By
Karen Westerberg Reyes, March & April 2005 AARP Magazine
Yes,
the system needs some adjustments, but we don’t need to destroy
it in order to fix it.
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.
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.
From
AARP Magazine
