Committee Of Correspondence

Making Social Security Secure

Henry Aaron
7:50 a.m.  Tuesday  7/16/96

Richard Thau fantasizes about the angst elected officials will face when they think hard about how Social Security reserves could be invested in private securities.

His concerns are exaggerated, because the arrangements he thinks cannot be fashioned already exist and the problems he conjures up have not, in fact, arisen. Federal employees may now allocate a part of their retirement funds to broad index funds. Somehow portfolios are selected. No call has arisen in Congress or elsewhere to use those funds to influence private business behavior. All one needs to do is apply the same system to the allocation of part of Social Security reserves to private investments exists. The system works.

Furthermore, investing Social Security reserves in private securities is desirable to credit workers with the social returns their contributions generate. When Social Security adds a billion dollars to its reserves, the federal government borrows $1 billion less from private savings, thereby freeing $1 billion for private domestic or foreign investment. The social return to Social Security reserve accumulation is the added production that this private investment makes possible–the private rate of return on investment. Shouldn’t Social Security beneficiaries be credited with the returns their contributions generate?

Henry Aaron
8:01 a.m.  Tuesday  7/16/96

Herb Stein asks whether I think there is no Social Security crisis today but that if nothing is done there will be a crisis in 30 years. My answer is simple and clear. There is no crisis today. But if nothing is done, there will, indeed be a crisis in 30 years.

This kind of a situation is neither unusual nor surprising. A 30-year-old who is saving too little for retirement can correct the problem easily by saving a little bit more. A 60-year-old who has never saved enough for retirement faces a crisis.

But a 30-year-old who mistakenly thinks he or she faces a crisis is likely to do something foolish. What I fear is that the rhetorical hysteria that some have tried to foment regarding the nature of the Social Security financing problem is really a political ploy to create the atmosphere in which people will be sympathetic to dismantling what has been the most successful social program in U.S. history–with no close second.

Richard Thau
8:14 a.m.  Tuesday  7/16/96

Social Security faces a crisis today–a fully justifiable crisis of confidence among my peers (I’m 31), who will be asked to pay for the Baby Boomers’ retirement, yet know there is no plan to accommodate these 70-million-plus people without bankrupting them in the process.

It’s the point that Henry and his fellow tinkerers continue to miss: Without major structural reforms that get us off this track of ever-spiraling FICA taxation, Uncle Sam can’t sustain a system that 63 percent of Americans 18-34 believe won’t be there when they retire.

Keep in mind, for a young family making $30,000 a year, Henry’s 1.8 percent FICA tax hike means another $540 sucked out of their wallets. And, under the trustees’ “pessimistic” assumptions–the ones that historically prove to be most accurate, not Henry’s–FICA taxes would have to rise 5.7 percent immediately to bring Social Security into actuarial balance over the next 75 years. That’s $1,710 in additional annual FICA taxes for that family. And we haven’t even touched on the increased costs of Medicare.

If we young adults had any reason to think that our leaders were willing to thoroughly restructure the entitlements pyramid now, rather than kowtow to the powerful seniors lobbies, perhaps our sense of crisis would subside. But until Bob Dole or Bill Clinton start to talk like Dick Lamm, the crisis will continue.

Carolyn Weaver
9:14 a.m.  Tuesday  7/16/96

Today’s workers have been handed an enormous debt by earlier generations–a set of unfunded benefit promises totaling trillions of dollars in present value terms. The public, I would suggest, is aware of this debt–if not its magnitude. We can try to perpetuate this system, continuing to issue new (off-the-books) debt and shifting the burden to future generations. Or we can move to a system of fully funded, individually owned investment accounts, in which case this debt gradually comes due. It can be met by issuing new debt–explicit bonds for Social Security’s implicit IOUs–and repaid over time, or it can be met by cutting government spending, increasing tax revenues, or more likely by some combination. By whatever means, current workers must help finance this debt–I say “help” because, depending on the financing scheme, the burden can be shared with the rest of the population or by future generations.

And, yes, even if the government issues debt as workers begin socking their money away in personal accounts, there are large economic gains to privatization. They result from halting the growth of new net liabilities under the old system–the Social Security debt is essentially frozen while saving through personal accounts grows over time; they result from creating a tight link between taxes paid and benefits received, eliminating costly distortions in labor supply and other compensation-related decisions; they result from reducing or eliminating the political risk now attached to long-range benefit promises by government; they result from allowing workers and families to be directly involved in investment decisions that will affect their own future well-being.

As to facts and fictions about the Social Security financing problem, it is important not to confuse facts with projections. The government actuaries involved in assessing Social Security’s long-range condition would be the first to admit the high degree of uncertainty surrounding their projections of the size of the deficit, future cost rates, and the date of insolvency. In the past five years alone, the projected deficit has doubled and, in the 13 years since the last bailout bill, nearly four decades have been lopped off Social Security’s date of insolvency.

Henry Aaron
9:20 a.m.  Tuesday  7/16/96

Richard Thau’s comments are detached from the reality that Social Security faces. I said nothing about raising Social Security payroll taxes 1.8 percentage points on today’s workers. Neither, to my knowledge, has anyone else. It isn’t necessary, and it isn’t desirable. Balance can be restored with no new taxes on today’s workforce.

Social Security is in surplus measured over the next 30 years. Richard Thau and others may shout “crisis,” but there is none.

Perhaps the real motive of at least some who would foment groundless hysteria is that they are in the upper ranges of the income distribution and don’t like the social objectives of Social Security. Social Security taxes everyone at the same rate, but low earners get back proportionately more in benefits than high earners. That system spares millions of disabled and elderly Americans the ignominy of welfare. Some people far enough along to know they will earn a lot want to get out so that they don’t have to help out those who fare less well. I think that is a shame–literally. Social Security has served America well in the past. It will do so in future.

Sen. Bob Kerrey
9:46 a.m.  Tuesday  7/16/96

There is no crisis in Social Security by the definition of federal budget analyses. That is to say the tax increases and program changes enacted in 1983 will keep the system solvent until at least the year 2029. However, the “fix” enacted in 1983 needs further fixing because of the following:

1) The assumption that we were raising taxes beyond what was needed to pre-fund baby boom expenditures (ending a pay-as-you-go system) has serious flaws, the biggest of which is that Congress has been spending the money which was to be set aside for pre-funding.

2) The demand of citizens for a more flexible retirement, i.e. they can retire earlier, and conflicts with the actuarial demands imposed by the cost of future retirement payments, i.e. they become eligible for payments later.

3) The payment system perpetuated the myth that Social Security is a savings program with individual accounts held for every beneficiary. Social Security is a strong and durable commitment of current workers to allow the first $62,400 of their wages to be taxed at a fixed rate in order to pay those who have met the eligibility requirements of Social Security. While it is not a welfare program, it unquestionably is not a savings program either. The battle cry “keep your hands off MY Social Security” needs to be answered with the rejoinder: Social Security belongs to current and future beneficiaries alike.

4) The ratio of workers per retiree is declining and life expectancies are growing. If we continue to see downward pressure on wages from international competition, productivity increases are not likely to provide a solution.

One additional problem must be observed. Medicare–a program which is an amendment to the Social Security Act–is also paid with payroll taxes and should be considered a sister to its larger retirement program. Certainly for beneficiaries Social Security payments and Medicare premiums are seen as one and the same. Both of these programs together are growing at an unsustainable rate. Unless current law is changed to alter the direction we are going, the entire federal budget will be payments made to beneficiaries or the institutions that serve them by the year 2013. I will not drag this argument too much further except to say that Americans should watch two sets of numbers:

1) The growing percentage of their budget which is used to pay entitlements vs. the shrinking percentage of their budget which is used for domestic investments. The percentage of our economy taken for all federal spending has remained a remarkably constant 19 percent.

2) The spending levels on citizens over the age of 65 vs. the spending levels on citizens in our K-12 educational system. In Nebraska there are 200,000 citizens over the age of 65 (one-seventh live in poverty) and 330,000 in our schools. We spend $3 billion on the first group and $l.6 billion on the second. The year-to-year increases are $400 million and $50 million respectively. I do not believe this can or should continue, especially when you examine internal disparities between poor and wealthy school districts.

So, while there is no crisis, I still believe the current law must be changed. The urgency for change is even greater if you want to reduce the adverse impact on either current beneficiaries or those who pay the bills. Further, for those of us who would like to see a part of Social Security become an individual savings program, there is also an urgency to change sooner rather than later. The reason is that wealth is generated as a consequence of the magic of compounding interest rates. To harness the power of compounding rates the most important variable is length of time I have saved. If I wait until I am 55 to start savings, I cannot reach the wealth I will need to cover my retirement costs. If I begin when I am 20 (or better yet at birth as Sen. Lieberman and I are suggesting with Kidsave), then I can save less and accumulate more.