Croker Sack

"Democracy is the theory that the common people know what they want, and deserve to get it good and hard." — Henry Louis Mencken (1880-1956)

Thursday, December 09, 2004

Social Security Offers No Old Age Retirement Security

Noting that the “old age” part of the Social Security pension system has a huge unfunded liability, President Bush stated today that he opposes tax increases to make up the difference.

The present value of that unfunded liability is between 10 and 11 trillion dollars – a fact often ignored when critics note that borrowing to finance a transition from the current system may total between 1 and 2 trillion dollars.

Since the taxes which would be needed to eliminate the unfunded liability are clearly much higher than what would be needed to repay the sums borrowed to finance a transition, the magnitude of the borrowing wouldn’t seem so daunting if it were always accompanied by an acknowledgement of the unfunded liability. (Could that be why those who oppose borrowing the necessary transition funds almost never say what the unfunded liability is?)

President Bush favors allowing younger workers to invest part of their earnings in their own retirement accounts, rather than into the Social Security system.

Since virtually all of those younger workers would receive no return on their “investment” in the Social Security system, the risk they would run by investing in private accounts pales in comparison to the certainty that Social Security taxes would earn them no return. (For lack of a better term, I use “investment” to refer to taxes paid into the system, but put the word in quotes to denote the fact that it isn’t a true investment. The people paying those taxes purchase nothing, not even a legal claim to some return on their money.)

Critics of private accounts always point out the risks involved in private investing, but rarely admit the lack of return on the younger workers’ taxes. (Could it be that the critics know they cannot persuade anyone unless they omit from their arguments the lack of return that would result from the current system?)

Social Security’s old age retirement system will – under current projections – need general tax revenue to meet its obligations beginning in approximately 2018. That means surplus Social Security taxes collected between 1983 and 2018 and loaned to the federal government’s general fund must be paid back by that general fund from regular tax revenue. (The surplus loaned to the general fund is the “Social Security trust fund” that is often mentioned.)

By approximately 2042, that Social Security “trust fund” will be gone, leaving the system able to pay only about 75 percent of the benefits retirees expect under current law.

Anyone born after 1975 take note: If the retirement age stays at 67, you will be eligible to receive full Social Security pension benefits in 2042 – but your benefits must be cut by 25 percent, or someone’s taxes must be raised to avoid that cut. How big a return on your “investment” do you think you’ll get from Social Security? When you consider all the facts, does investing your own earnings in your own accounts seem so risky in comparison to what you face under the current Social Security retirement system?

People born before 1975 take note: The problem has absolutely nothing to do with waste, fraud or abuse. People now collecting retirement pensions from Social Security got a terrific return on their “investment,” because there were fewer retirees whose benefits needed to paid by those who were still working. They paid less into the system, because less was needed. As the number of retirees grows in the near future, there will be fewer workers per retiree paying the benefits of those retirees. Not one dime of the taxes current retirees paid into the system was set aside to pay their benefits later – all their benefits have been paid by people who were still working. That’s the way it has always been.

Whether future retirement income is derived from taxes or privately owned investments, the biggest constraint on making those payments to retirees will be the availability of earnings with which to pay.

Private investments make it more likely that the economy will be sufficiently productive to pay those future retirees, but tax increases make it less likely that the economy will grow enough to pay them.

The unfunded liability of the Social Security old age retirement system is the reason change is necessary.

The need for economic growth to support people in their old age is the reason why the change must include private investment accounts as a substitute for a substantial part of the current Social Security system.


Blogger Michael Gorsuch said...

Private account seem to be the way to go. With the option available to invest in stocks or bonds, people can govern their own level of risk.

Besides the pracitcally zero ROI w/ the current system, Congress can remove it at any time.

December 11, 2004 9:44 AM  

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