Illustration by Marc Rosenthal
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Myths and Truths About Social Security
By Karen Westerberg Reyes, March & April 2005
Yes, the system needs some adjustments, but we don’t need to destroy it in order to fix it
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Social Security is the ultimate support system, a monetary cushion for
grandmothers and granddads, but also a lifeline for widows, widowers,
divorcées, orphans, and people with disabilities. For the average
American over 65, Social Security makes up nearly 40 percent of income. For
about 20 percent, it is their only income. The system has worked well for some
70 years now with few adjustments. These days, it's on everyone's
radar. That's because President Bush has put Social Security reform at the
top of his second-term to-do list. He and many others argue that big changes
are necessary if Social Security is to survive, much less thrive. But there are
those, AARP included, who believe a radical overhaul could spell
disaster—the end of Social Security as we now know it.
Is the current Social Security system really at death's door, or are the
rumors of its demise greatly exaggerated? Following are some common
misconceptions.
Myth: Social Security is broke.
Those who argue that Social Security needs a dramatic reorganization begin
with this premise: the system is failing; Social Security isn't sustainable
in its present form. From there, the argument goes that what's best for the
country is some form of privatization. With privatization, a portion of the
Social Security taxes now paid would be diverted into an account that each
taxpayer would control themselves. (Under the current system, all surplus
Social Security revenue is invested in special U.S. Treasury bonds.)
So, is Social Security about to go bust? Not by a long shot. In fact, Social
Security is in better shape today than at any other time since it was enacted
in 1935. That's because of some judicious adjustments suggested in 1983 by
a commission set up by Ronald Reagan and headed up by Alan Greenspan. Since
then, trust fund reserves have gone from nearly zero to $1.6 trillion.
Social Security trustees acknowledge that by 2028 the system will need to
start redeeming the bonds in its reserve, but they calculate that the fund will
be able to meet 100 percent of its obligations until 2042. By that date, the
principal will be exhausted, but the system will still bring in enough revenue
from taxes to pay nearly 75 percent of benefit amounts. (An even rosier
Congressional Budget Office report says the system will be able to pay full
benefits until 2052, and 80 percent after that.)
Myth: The fund starts getting into trouble in
2018.
Not true. The year 2018 is when Social Security benefit payments are
expected to exceed payroll tax revenues. That's not exactly cataclysmic.
Reason: from 2018 through 2027, incoming tax revenue combined with interest
earnings will still be enough to pay benefits and build the trust fund balance.
Beginning in 2028, as mentioned, the trust fund principal will have to be
tapped, and that'll get us through 2042—even if we do nothing.
Clearly a tune-up is needed to extend Social Security's life beyond that
horizon. "But dismantling the whole system would be like buying a new car
because the one you have has a flat tire," says Peter R. Orszag, a senior
fellow of economic studies at the Brookings Institution in Washington, D.C.
Myth: The Social Security reserves are only on
paper.
Well, yes, but that paper is U.S. Treasury bonds, which have been earning a
combined interest rate of about 6 percent a year. For more than 200 years, in
good times and bad, during wars and depressions, American bonds have always
paid off. They're one of the safest investments in the world. In 2003, some
$80 billion, about 13 percent of Social Security's total income, came from
the interest from these bonds.
Myth: The 77 million baby boomers marching toward
retirement are going to break the system.
Advocates for radical reform point out that once the boomers retire, they
will start taking more money out of the system than younger workers are putting
in. The oft-cited statistic is that by 2040 there will be just two workers for
each retiree. (Today there are just over three workers for each retiree.) But
that fact, while accurate, fails to acknowledge that workers today are more
productive, earn higher wages, and plan to stay in the workforce
longer—all factors that will help fill the future gap. In fact, in the
near term, this population juggernaut, being at the peak of its earning years,
is currently helping to amass a huge surplus in the fund.
Once boomers start retiring, sure, that's going to put a strain on the
system. "But it isn't going to be Armageddon," says Kenneth S.
Apfel, former commissioner of the Social Security Administration and current
member of the faculty at the LBJ School of Public Affairs at the University of
Texas at Austin.
Diverting part of Social Security contributions to private accounts would "blow a hole" in the entire system.
We can strengthen Social Security by making small adjustments, just as
we've done in the past. These include raising the cap on wages subject to
Social Security (currently you're taxed on income up to $90,000) and
investing part of the Social Security surplus in other vehicles that pay higher
interest than Treasury bonds do.
Myth: A system of private accounts would save Social
Security.
The buzz phrase being bandied about by those who favor privatization is
"an ownership society." They favor taking a portion of Social
Security taxes and diverting it to individuals to invest. They say such a
system would give workers ownership of their money. It would allow taxpayers to
put their own dollars into stocks, bonds, and other investments that would pay
them a higher return.
Those who oppose privatization, including AARP, argue that setting up
private accounts would effectively scuttle Social Security. "Siphoning
money from Social Security will not strengthen it," says David Certner,
AARP's director of federal affairs. "It will just make the problem
much worse."
First, the transition costs alone would be crushing—as high as $2-$3
trillion, according to AARP's own economic analysis. "The amount of
additional national debt that would generate could eat into any returns people
might actually get from a private account system," says Barbara Kennelly,
president and CEO of the National Committee to Preserve Social Security and
Medicare, a 3.2-million-member organization located in Washington, D.C.
Second, diverting a portion of Social Security money to private accounts
means that there would be fewer dollars available to pay Social Security
benefits. That would leave the whole system with less of a reserve, as well as
less cash on hand to pay beneficiaries. This situation would lead to hard
choices: cutting benefits, raising taxes, or doing none of the above and
watching the trust fund run out of cash sooner.
According to a letter entitled "The Consequences of Social Security
Privatization," signed by Congressmen Charles B. Rangel (D-NY) and the
late Robert T. Matsui (D-CA), diverting a portion of workers' current
Social Security contributions to private accounts "blows a hole in the
Trust Funds…and directly threatens our ability to pay current
retirees." They predict that under privatization the trust fund reserves
will be wiped out by 2021, a full 20 years sooner than if the system had been
left alone.
Myth: Private accounts will give individuals more
control.
People already have control over their money when they invest in private
pensions, IRAs, and 401(k) plans. When combined with the solid foundation that
Social Security provides, these are excellent vehicles for retirement savings.
"What we should be doing is making these work better," says
Orszag.
Myth: Individuals will get higher returns with
private accounts.
Surely you can do better with your investments than a big bureaucratic
government agency can, say those who favor private accounts. Well, the truth
is, some people may do better. But who's going to pay for the care and
feeding of all those who do worse?
"Under privatization, current workers will have to pay three
times," says Certner. "Once to ensure the benefits for those
currently at or near retirement, once for themselves, and once more for those
whose investments didn't pan out." In the current Social Security
system, the risk is near zero. You know it will be there regardless of what the
market does. That's because U.S. Treasury bonds don't crash when the
stock market does.
So what can be done? Yes, the Social Security system needs some work, but
there's nothing so seriously wrong with it that some due diligence and
nonpartisan intervention and planning can't repair. "There's no
need to take the risky step of privatization," says Kennelly.
Karen Westerberg Reyes, planning editor, is the magazine's Social
Security specialist.
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