In recent weeks a debate has been growing about the future of Social Security. Watching these arguments, one might conclude that President Bush believes the program is in imminent danger of collapse and can only be saved by privatization, while Democrats believe that Social Security is not in crisis, and therefore privatization is not needed, or at least not yet. Many young people have misconceptions about the program and its future, leaving them without a clear opinion. The truth is that privatizing Social Security will never help keep it solvent, no matter when it runs into financial trouble.
Social Security is perhaps the most popular government program. By supplementing personal retirement savings, it has been enormously successful in keeping seniors out of poverty. Contrary to popular belief, Social Security is not a savings and investment program. There isn't a vault somewhere full of sacks with actual dollars in them, each one marked with an individual Social Security number.
Instead, the program takes in only slightly more money each month than it pays out in benefits. Social Security taxes are assessed separately from general income taxes. Unlike the taxes you pay each April 15, they show up on your pay stub each week, but not in your W-2. They're completely separate. Social Security taxes are taken at a flat rate and target only salary income below a certain cap instead of having higher brackets as income rises. That means the rich bear less of the Social Security burden.
This system is not the same as investing for retirement. Most of the taxes you pay each month are spent that same month. The reason you'll be able to collect Social Security upon retirement isn't because all your contributions will be waiting for you, but because tomorrow's workers will be taxed. Historically, retirees have always gotten more out of Social Security than they paid in due to the growth of the economy. Though it doesn't produce the big returns the stock market can, Social Security also avoids the market's big losses. This is the system's strength. When the tech bubble burst, plenty of people's retirement accounts took a big hit, but their Social Security checks kept coming.
Each month's extra money goes into the Social Security Trust Fund and is invested in U.S. Treasury bonds. At the beginning of 2004 there were $1.5 trillion worth of these bonds, and they earn more than $80 billion annually in interest. Like other government bonds, they are promises from the United States to pay back the stated amount, and are essentially an intragovernmental loan.
The problem is that the number of retirees is growing while the number of workers is decreasing. Currently there are 3.3 workers for each retiree. Within 40 years that will decrease to two workers per retiree. As a result, starting in 2018, Social Security will start operating at a loss-spending more each month in benefits than it takes in through payroll taxes. To make up for that difference, it will start dipping into the Trust Fund. By 2042, the Trust Fund is expected to run dry. That's not necessarily a bad thing. The Trust Fund was created specifically to pay for that increasing number of retirees. But since there's no actual dollars in the Trust Fund, only government bonds, the government will have to come up with the money it owes to future retirees somehow.
This is the essence of the disagreement: Bush characterizes the bonds as nothing but airy promises and presents the earlier year as the crisis date. Democrats, noting that government bonds are among the most secure investments because the United States cannot go out of business, say the system is fine until 2042. Even then, if the economy grows as quickly as it historically has, fewer workers will be needed to support each retiree.
In either case, while it's premature to say that Social Security is in crisis, eventually there may be too little money to pay each month's beneficiaries. When that happens something will need to be changed-raising the tax rate, taxing the rich on all of their income, lowering benefits or even borrowing more money from private markets, as the government already does to finance the deficit.
The most important thing to know is that privatizing Social Security will not prevent this. Allowing workers to divert some of their payments into private accounts won't prevent the well from running dry. In fact, it will mean that even less money will be available each month, because part of the current tax stream will have been diverted. This can only make the crisis occur sooner.
Even worse, privatizing Social Security will drive up the cost of running the system. Currently, Social Security spends only a tiny percentage of its income on administration. With private accounts, each small contribution would need to be invested separately, making administrative costs skyrocket. It's not as if Wall Street bankers create investment strategies out of the goodness of their hearts. Privatizing Social Security won't make the system more secure, but it will yield big fees for investment bankers. Perhaps that's why they've lobbied so hard to take money out of the stable Social Security system-because that way it can end up in their own pockets.
opinion@dailycardinal.com.
