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In 1938, the Social Security Act was only three years old, but its future
was already very much in doubt. Conservatives claimed it would bankrupt the
nation, and independent critics argued that the way it was financed amounted to
''financial hocus-pocus,'' as one editorial in The New York Times put it.
President Franklin D. Roosevelt defended the program, said by a cabinet member
to be his favorite, with some of his trademark oratory. ''Because it has become
increasingly difficult for individuals to build their own security,'' the
president told a national radio audience, ''government must now step in and
help them lay the foundation stones.''
Social Security did become the cornerstone -- not only the biggest
government entitlement plan but also the most universal, the most popular and
the most enduring. But the debate over Social Security never ended. Barry
Goldwater wanted to repeal it; Milton Friedman wrote in 1962 that it was an
unjustifiable incursion on personal liberty; and David Stockman, the budget
director who personified Ronald Reagan's efforts to shrink the federal
government, tried to take a hatchet to Social Security, which he called a
''monster.''
But in this 70-year struggle, no other conservative has ever come as close
to transforming the program as George W. Bush. He is making Social Security
reform, including a partial privatization, a centerpiece of his second term. If
the most ardent ideologues have their way, such a reform would be a first step
toward a wholly new approach to retirement security -- one that would set aside
the notion of collective insurance and guaranteed minimums for that of personal
investing and responsibility.
This could do more to reverse the New Deal, and even the Great Society, than
Goldwater, Stockman and Reagan ever dreamed of. ''We call it a conservative New
Deal,'' says Stephen Moore, author of ''Bullish on Bush: How George W. Bush's
Ownership Society Will Make America Stronger.'' In
The campaign to privatize has not only been about ideology; it has also
focused on Social Security's supposed insolvency.
The campaign is potentially self-fulfilling: persuade enough people that
Social Security is going bankrupt, and it will lose public support. Then
Congress will be forced to act. And thanks to such unceasing alarums, many, and
perhaps most, people today think the program is in serious financial trouble.
But is it? After Bush's re-election, I carefully read the 225-page annual
report of the Social Security trustees. I also talked to actuaries and
economists, inside and outside the agency, who are expert in the peculiar
science of long-term Social Security forecasting. The actuarial view is that
the system is probably in need of a small adjustment of the sort that Congress
has approved in the past. But there is a strong argument, which the agency
acknowledges as a possibility, that the system is solvent as is.
Although prudence argues for making a fix sooner rather than later, the
program is not in crisis, nor is its potential shortfall irresolvable. Ideology
aside, the scale of the fixes would not require Social Security to abandon the
role that was conceived for it in 1935, and that it still performs today -- as
an insurance fail-safe for the aged and others and as a complement to people's
private market savings.
PREDICTIONS AND BEST GUESSES
About 47 million people -- retirees and their dependents, under-age
survivors of deceased workers and the disabled -- receive a check from Social
Security every month. The money for this colossal endeavor comes from a payroll
tax on current workers and on their employers. The program is a model of
efficiency; expenses are low, as pension plans go, and participation is near
universal. Benefits rise with the level of earnings, but they are tilted toward
progressivity, so that those at the bottom get more
in proportion to their earnings and those at the top get less. Social Security
also delivers a considerable nonmonetary benefit:
people who have contributed throughout their working lives know that, regardless
of the ebb and flow of their careers and, indeed, of the stock market, a
guaranteed pension awaits them.
Currently, Social Security is running a hefty surplus; the payroll tax
brings in more dollars than what goes out in benefits. By law, Social Security
invests that surplus in Treasury securities, which it deposits into a reserve
known as a trust fund, which now holds more than one and a half trillion
dollars. But by 2018, as baby boomers retire en masse, the system will go into
deficit. At that point, in order to pay benefits, it will begin to draw on the
assets in the trust fund.
The debate over Social Security's solvency is really two debates. The first
is over how long the trust fund will last. The law requires the Social Security
Administration to estimate its financial condition for 75 years into the
future, and the agency's conclusions depend on the assumptions it makes about
what
Politicians and other commentators tend to speak about these long-range
trends, or at least about Social Security's finances, with an air of precision.
This is almost amusing, since few economists can predict the swings in the
federal budget even a year in advance. Joshua Bolten,
head of Bush's Office of Management and Budget, said of Social Security last
month, ''The one thing I can say for sure is that if left unattended, the
system will be unable to make good on its promises.'' But the Social Security
Administration itself pretends to no such certainty. Its actuaries (about 40
are on staff) frankly admit that the level of, say, immigration in 2020, or of
wages in 2040, is impossible to forecast. ''The only thing we are sure of is
that it won't happen precisely as we project,'' says Stephen Goss, the chief
actuary at the agency. And the trustees' annual report, which is based on the
actuaries' analysis, takes pains to say that it is not making a prediction. It
makes a projection -- three different ones, actually -- that amount to informed
but very rough guesses. The agency's best guess, labeled its ''intermediate''
case, is that the system will exhaust its reserves in
2042. At that point, as payroll taxes continue to roll in, it would be able to pay
just over 70 percent of scheduled benefits. That would leave a substantial
deficit, but one that Congress could easily avert if it were to act now when
the projected problem is more than a generation away.
What's more, there is a strong case to be made that the agency is erring on
the side of being overly pessimistic. If its more
optimistic projection turns out to be correct, then there will be no need for
any benefit cuts or payroll-tax increases over the full 75 years.
No one can definitively predict that outcome, either, of course, but David
Langer, an independent actuary who made a study of Social Security's previous
projections compared with the actual results in 2003, thinks the ''optimistic''
case is its most accurate. Over a recent 10-year span, the trustees'
intermediate guesses turned out to be quite pessimistic. Its optimistic guesses
were dead on, and its pessimistic case -- sort of a doomsday situation -- was
wildly inaccurate.
And, contrary to widespread belief, recent demographic trends have been
modestly better (from an actuary's gloomy standpoint) than anticipated. For
instance, longevity hasn't increased as much as expected. Partly as a result,
since 1997 the agency has pushed back, by 13 years, the date at which it
projects its reserves will be exhausted. In other words, as the cries of
impending doom started to crescendo, the guardians of the system have grown
more optimistic.
IS THE TRUST FUND TRUSTWORTHY?
The second debate concerning solvency is over whether the securities in the
trust fund will be honored or whether, in
This isn't what some conservatives have said. Paul O'Neill, the former
treasury secretary, went so far as to say that Social Security has no assets.
In anti-Social Security literature, the ''no assets'' contention isn't even
debated; it's treated as gospel. According to Michael Tanner, head of the Cato
Institute Project on Social Security Choice, the agency's pauperism has turned
Cato, a libertarian policy center founded in the late 1970's, has been
arguing for 25 years that Social Security is on the verge of crisis. In a
recent position paper, Tanner wrote that Social Security faces a horrendous unfinanced liability of $26 trillion over 75 years. In a
footnote, he cited the 2003 trustees' annual report. Actually, the trustees'
intermediate projection is for a deficit, over 75 years, of $3.7 trillion.
Though that is a lot of money, it could be covered by an immediate surcharge to
the payroll tax of less than two percentage points, or by various combinations
of tax hikes and benefit cuts, each of them quite manageable. But $26 trillion
is too big a hole to fix. When I asked Tanner about the footnote, he admitted
that the trustees didn't actually say $26 trillion; Tanner derived the figure
by counting the cash-flow deficits that the trustees project from 2019 on out.
In other words, he ignores the next 15 years or so, during which time Social Security
will be running a surplus. And he assumes that the assets in the trust fund,
which should be accruing interest into the 2040's, won't exist, either. Tanner
counts only the bad years and only the bad numbers. Another doomsayer, former
Republican Representative John Kasich, pegged the Social Security deficit at
$120 trillion in a recent op-ed -- some 32 times the agency's figure. (Kasich
toted up annual deficits in nominal -- not inflation-adjusted -- dollars for
every year through 2080, by which time a hamburger could cost $40.)
Such hyperbolic claims aside, there is a serious issue at the heart of what
worries critics. It isn't that the trust fund is broken; it's that the
existence of the fund is seducing the government to spend more than it otherwise
would, thus brooking larger deficits in the future. Since Social Security lends
its surplus to the Treasury (that's what it means to be investing in
Treasuries), it is parking its surplus cash with the government. And just as
lending money to a child outside a candy store may impose an impossible
temptation, so the government may feel tempted while it holds onto Social
Security's purse.
Ideally, Congress would recognize that the surplus is only temporary and
would, therefore, take pains that the money lent to it is properly saved --
that is, that it run a surplus. But the government is operating at a deficit.
So you must conclude that rather than saving Social Security's surplus, the
government has been spending it -- on the military, education, tax cuts. In
only 15 years, the government will have to start repaying its debt to Social
Security. It will be able to do so. If need be, it will borrow, as it has
borrowed for many purposes since 1776. The amount of borrowing, which could
very gradually scale up to 1 or 2 percent of the country's gross domestic
product, will be far smaller than the present federal deficit, which is just
under 4 percent of G.D.P. But to avoid layering one deficit atop another, the
government needs to exercise discipline -- to not overindulge in candy -- in
the years when Social Security is running a surplus.
DEMAGOGUES, DOCTORS AND DEFICITS
The fear that the trust fund would represent a ''perpetual invitation'' to
Congress has bedeviled Social Security since its inception. Economists of the
1930's knew that every pension plan starts with more workers contributing into
the system than there are retirees. But down the road, as those workers retire,
obligations mount. Therefore, they recognized, any system that builds an
adequate reserve for the future must collect more than it needs in the early
years. And though social scientists of the 30's could not anticipate the war or
the baby boom that would follow it, they knew that
In 1934, when Franklin Roosevelt formed the Committee on Economic Security
to design what was in effect the first federal safety net, the committee hired
three actuaries to stargaze into the future. The actuaries predicted that the
proportion of Americans over 65 -- then only 5.4 percent -- would rise to 12.65
percent in 1990, meaning that retiree costs would soar. They were just a tad
high; the actual figure would be 12.49 percent.
The committee was sharply divided on how to prepare for this demographic onslaught.
Harry Hopkins, who oversaw the New Deal's relief program, thought the
But alarm was very much the order of the day. When Roosevelt was swept into
office in 1933, he had been preoccupied with the emergency of the Depression --
10 million unemployed, 18 million on relief, the country's business output cut
by a quarter and its morale shattered. He responded with a whirlwind of
legislation and with rhetoric that, for a while, truly inspired. By 1934, the
energy of the New Deal's first days had begun to subside, and yet the
Depression had not abated. Meanwhile, the administration was being outflanked
by political zealots, utopians and snake-oil salesmen, who increasingly
appealed to desperate Americans. In
By far the oddest of these ducks was an elderly doctor in
''The Congress can't stand the pressure of the Townsend Plan unless we have
a real old-age insurance system, nor can I face the country without'' one,
Roosevelt told his labor secretary, Frances Perkins. Each had been thinking of
social insurance since well before the emergence of Townsend -- as governor of
In January 1935, the Economic Security committee delivered a sweeping
proposal for ''cradle to grave'' insurance. Much of the bill merely authorized
the federal government to distribute aid to the states, but two aspects of it
were revolutionary: a plan for unemployment insurance and one for retirement. F.D.R.,
however, was greatly troubled by a detail in the latter. Though the payroll tax
was scheduled to rise, in staircase fashion, within two generations it would be
insufficient to cover benefits. Perkins explained that as the number of
retirees rose, funds from the Treasury would have to cover the shortfall.
''Ah, but this is the same old dole under another name,'' F.D.R. said.
F.D.R. had hoped that handouts would no longer be necessary as the economy
recovered, and he shrewdly anticipated that in future generations, welfare-type
programs would be vulnerable to political attack. He wanted Social Security to
be different -- universal and enduring. Therefore, he insisted, it had to be
self-supporting. Thus was conceived the (soon-controversial) trust fund. To
build a future reserve, the New Dealers doubled the initial level of the
payroll tax to 2 percent, applied up to a cap that was initially set at $3,000
of income. This added a regressive aspect to the plan, shielding the highest
income brackets. Nonetheless, in August 1935, legislation was enacted that, in F.D.R.'s words, would ''give some measure of protection to
the average citizen.''
The public strongly supported the new program, but conservatives attacked it
as a socialistic scourge. Playing on the fact that each worker was to receive a
government number, the Hearst papers published front-page illustrations of a
man wearing a chain with a dog tag. Henry Ford said Social Security could cost
Americans their basic freedoms, like the right to change jobs or to move from
one town to another. A shareholder in a utility filed suit,
claiming that the payroll tax was unconstitutional. The case went to the
Supreme Court, where, in 1937, Justice Benjamin Cardozo,
as if to resolve the historic debate over federalism, ruled, ''The conception
of the spending power advocated by
But the opposition wouldn't die. The issue that sparked the loudest protest
was one that still burns today: the trust fund. Deductions from pay envelopes
began in 1937, but benefits weren't scheduled to start until 1942, and there
was a great deal of mistrust about where the money was going. Government actuaries
sheepishly explained that Social Security was building a reserve eventually
expected to reach $47 billion. This was an awesome sum -- eight times the total
then in circulation. Alfred Landon, the Republican who ran against
To quell the furor,
THE FIRST (AND ONLY) CRISIS
The crunch came, as actuaries had predicted, in the late 1970's. Part of the
problem they had not foreseen; Social Security benefits were skyrocketing
because of inflation. In the 70's, Congress decided to index retirees' benefits
to the cost of living. The timing was awful. Not only did inflation soar, but
incomes -- the basis of payroll contributions -- stagnated. Critics like those
at the newly formed Cato Institute warned of disaster. A former Nixon cabinet
member, Peter Peterson, began to attract attention by arguing that any pay-as-you-go
system (in which one generation supports another, as today) was inherently
unstable, and advocated deep cuts in the rate at which benefits increased. The
criticism had an ideological as well as an economic edge. In a pre-financed
system -- in which, for instance, each worker invests for his own later
retirement -- society never faces a liability. But individuals may come up
short (if their investments fare badly) and live out poorer retirements.
President Carter, responding to the darkening outlook, became, in 1977, the
first president to legislate a belt-tightening.
Carter's efforts, however, didn't suffice. The trouble was that Social
Security's actuaries had been way too optimistic. The actuaries had assumed
that from 1978 to 1982 inflation would total 28 percent; the actual figure
would be 60 percent. And they had predicted that wages would grow by 13 percent
after inflation, whereas, in fact, real wages didn't rise at all; they
declined. Social Security's experts were hardly the only people surprised by
the dreadful economy, which was buffeted by skyrocketing oil prices,
As a candidate for president, Reagan had proclaimed that he was ''pledged to
a Social Security program that will reassure these senior citizens of ours
they're going to continue to get their money.'' By then, Social Security had
become a program that politicians couldn't afford to oppose and, indeed, that
most Americans supported. President Eisenhower, a Republican, had proved this
in 1956 when -- to the great disappointment of conservatives -- he supported a
significant expansion of Social Security to include the disabled. But among
adamant free marketers, the dream of upending Social Security lived on. One of
the more prominent postwar opponents, in fact, was Reagan, a disarming actor
then transitioning to political life.
Reagan began speaking out against Social Security in the late 50's. At the
time, Democrats were trying to extend Social Security to health care -- to what
would eventually become Medicare -- and Reagan worked with the American Medical
Association to try to stop them. The A.M.A. conducted a stealth campaign
(unearthed in 1999 by the political scientist Max Skidmore) known as Operation
Coffee Cup, in which doctors' wives would urge women in their communities to
oppose the plan in letters to Congress. Reagan produced a record album for that
campaign in which he criticized Social Security for ''supplanting'' private
savings and warned that subsidized medicine would curtail Americans' freedom.
Warm and folksy even as he envisioned a bleak Orwellian future, Reagan said
that Big Brother could start with health care, ''and pretty soon your son won't
decide when he's in school, where he will go or what he will do for a living.
He will wait for the government to tell him.''
Reagan gave slightly altered versions of this speech in personal appearances
around the country, attacking Social Security as a ''sure loser'' of a program,
and one that would worsen, not alleviate, the hazards of age. In the 70's,
Reagan continued to sermonize against Social Security, often suggesting that it
be made voluntary or more voluntary. At first blush, this sounded reasonable.
As most people don't save enough for their retirement, however, under a
voluntary system many who opted out would wind up destitute. Higher-earning
workers (who get a lower proportional return on their payroll taxes) would opt
out for certain. This problem is known as adverse selection. Wealthier people
contributing higher taxes exit the system, leaving less revenue and a higher
burden for the poorer people who remain. In effect, it would become an
unpopular welfare program.
Once Reagan was in the Oval Office, he allowed his budget director, David
Stockman, to handle the crisis. Stockman, who was waging a war on government
spending, tried to exploit the moment to curtail Social Security sharply. It
was Stockman's idea to cut benefits to early retirees by one-third. Without
those cuts, he warned, the
The 15-member commission got nowhere until December 1982. Then, with default
only months away, an unofficial subgroup began to meet in secret. Robert Ball,
a former Social Security commissioner, and Senator Daniel Patrick Moynihan
negotiated for the Democrats opposite Baker for the White House.
In the end, they compromised on a combination of benefit cuts and tax hikes.
The payroll tax, then 10.16 percent, was already scheduled to rise, but the
negotiators sped up the implementation of the increase. (Today the rate is 12.4
percent.) Moreover, Congress agreed to hike the retirement age from 65 to 67.
This change, which is being phased in very slowly (the retirement age is now 65
and 6 months) had the same effect as cutting benefits. Greenspan and company
now calculated that Social Security would build a giant reserve, sufficient to
see it through the middle decades of the 21st century. This was the original
F.D.R. approach -- build a trust fund. President Reagan said the package
''assures the elderly that
Social Security's next few annual reports made best-guess (intermediate)
projections of solvency for 75 years, meaning it expected the system to remain
solvent until 2060 and beyond. So the question that should arise now, but that
has been oddly ignored is, What happened?
ARE ACTUARIES TOO GLOOMY?
Nothing did. Or in the words of Robert Ball, the
nonagenarian former commissioner, ''nothing in the real world.'' But
perceptions changed, and the balance of opinion began to shift in favor of
reform. To some extent, that shift was bipartisan. In the mid-1980's
and early 90's, Democrats discovered they didn't love deficits after all. When
it began to appear that Congress was incapable of keeping its hands off Social
Security's surplus, fiscally prudent Democrats like Moynihan and Bob Kerrey
came out in favor of individual accounts. President Clinton famously campaigned
to ''save Social Security first'' -- meaning that Congress should balance the
budget. Meanwhile, the popular impression that any fool could make money in the
stock market (for a while, any fool did) made private accounts seem like a
natural. In the 1996 campaign, even among Republican contenders, only Steve
Forbes favored privatization; by 2000 it was party doctrine.
Social Security's actuaries also began to make more pessimistic assumptions
about the future. To quote the report of yet another Social Security advisory
panel, this one from the mid 90's, ''It is pointed out that while today there
are 3.3 workers paying into the system for every beneficiary drawing benefits,
over time this ratio will change to two workers per beneficiary. . . . However,
this has almost nothing to do with why there is a . . . deficit.'' The report
continued, ''The ratio was fully taken into account in the 1983 financing
provisions.'' So why did Social Security begin to forecast a more rapid
exhaustion of the trust fund? Social Security was burned in the 70's and early
80's by being too optimistic. Now the actuaries are leaning the other way.
''It's a less optimistic estimate today,'' says Harry Ballantyne,
who was chief actuary until 2001.
Social Security's key long-range projection is that, over 75 years, it will
come up short by an average of 1.89 percent of payroll. Though deficits would
still loom beyond 2080, the problem could be fixed until then by an immediate
tax increase of 1.89 percent, or a benefit cut of roughly 13 percent.
(Democrats tend to favor a combination.) But this all assumes that the middle
projection is right. And several underlying assumptions of that middle
projection tend to exaggerate the potential deficit. The first concerns
longevity. A 65-year-old man today can expect to live to nearly 82. According
to the most likely projection, in 2080 he should expect to live to 86. Goss
says that the agency is assuming that medical technology will deliver more
''miracles.'' Most demographers agree with him, and some even think the agency
is not being optimistic enough. The only trouble is, as Goss notes, that over the
past 20 years ''they have been wrong at every turn. There has been less
improvement than we were expecting.'' Indeed, the improvement in mortality has
slowed significantly. And no one is sure why it has slowed. Nonetheless, the
agency expects a sharp rebound over ensuing decades. Its fiscal gloominess thus
depends on a speculative uptick in medical miracles.
Immigration is another contentious point. Immigration is good for the system
because immigrants are earners and taxpayers. Though immigration has been
rising, Social Security projects that it will taper off sharply, from 1.2
million a year to 900,000 in 20 years. This forecast is curious, because if the
birthrate in
Rising wages are also a boon to Social Security's finances. Forecasting
wages is difficult, as the trustees' report frankly admits, but it seems
undeniable that as society ages, businesses will be harder pressed to find
workers, and that should push wages higher. The trustees, however, project that
real wages will grow at only 1.1 percent a year -- roughly equal to the level
of the last 40 years.
The basic point here is that tiny swings in any of these or other factors
could improve -- or worsen -- the program's balances. If a few of them lean in
the direction of the optimistic forecast, the trust fund will cover benefits
through 2080, or close to it. Would such a program, which appears to be solvent
or near solvent until the limit of what is humanly forecastable,
be improved upon by the various schemes for privatization?
PRIVATE ACCOUNTS DON'T SAVE MONEY
Social Security does not provide, and was not meant to provide, a
satisfactory retirement on its own. The average stipend for a 65-year-old
retiring today is $1,184 a month, or about $14,000 a year. About half of
Americans also have private pension plans, but for two-thirds of the elderly,
Social Security supplies the majority of day-to-day income. For the poorest 20
percent, about seven million, Social Security is all they have. Even those
figures understate the program's importance. According to an agency
publication, ''Income of the Population 55 or Older: 2000,'' 8 percent of
elderly beneficiaries were poor, but a startling 48 percent would have been
below the poverty line had they not been receiving Social Security. Charles Blahous, the White House point man on Social Security,
publicly criticized this calculation as ''mindless,'' and the Social Security
agency no longer computes the figure.
Conservative economists say the figure is irrelevant: if Social Security
didn't exist, people would save more. This may be true of economists, but what
about the rest of us? The argument illustrates the ideological agenda of those
who favor privatization: they want to change people's behavior. But how will
the proposals to privatize, several of which are before Congress, actually
work? Basically, younger workers would be allowed to divert a portion of their
payroll taxes into individual accounts. Upon retirement, these workers would
get lower Social Security benefits supplemented by whatever had accumulated in
their portfolios.
But since the diverted money would not be available to pay benefits to
current retirees, the government would have to undertake significant borrowing
to pay people now in their middle and older decades. Eventually, the system
might transition to one in which most people mostly relied on their personal
accounts. But this transition would take many decades.
The president is expected to back a plan similar to one recommended by the
advisory council he appointed, in 2001. That plan opts for a slow transition,
keeping entitlement-type minimums in place. The amount of money to be diverted
into personal accounts -- and therefore, the potential gains -- is relatively
small. Some free-market purists are unhappy about this. But Bush's economists,
whatever else is said of them, are determined not to re-enact the Stockman
debacle by moving too quickly and enacting immediate cuts. They have read their
history.
The White House asked the Congressional Budget Office to analyze one
advisory council plan. That plan would allow workers born after a certain date
(perhaps 1950) to siphon about a third of the payroll tax into individual
accounts, up to $1,000 a year. The money could be invested in any of three
choices (other plans provide for wider menus) and would be converted into an
annuity upon retirement.
The C.B.O. assumes that the typical worker would invest half of his
allocation in stocks and the rest in bonds. The C.B.O. projects the average
return, after inflation and expenses, at 4.9 percent. This compares with the 6
percent rate (about 3.5 percent after inflation) that the trust fund is earning
now.
Proponents hail the plan for forcing savings on the government. But the
diversion of money into individual accounts would save the government nothing,
since it would have to borrow to offset the loss of the diverted dollars. The
individual accounts represent a transfer, not a savings.
The second feature of the plan would link future benefit increases to
inflation rather than to wages. Because wages typically grow faster, this would
mean a rather substantial benefit cut. That cut would mean a savings for the
government. This is a political choice; we can always save money by reducing
benefits. But it's important to stress that the savings result from cuts, not
from the decision to privatize.
Overall, the plan is gentler toward lower-income seniors than wealthier
ones, but all seniors would be poorer than under present law. In other words,
absent a sustained roaring bull market, the private accounts would not fully
make up for the benefit cuts. According to the C.B.O.'s
analysis, which, like all projections of this sort should be regarded as a best
guess, a low-income retiree in 2035 would receive annual benefits (including
the annuity from his private account) of $9,100, down from the $9,500 forecast
under the present program. A median retiree would be cut severely, from $17,700
to $13,600. On the plus side, budget deficits would be lower in the future.
But, because of the lengthy transition, that ''future'' is exceedingly remote
-some 50 years down the road. In the interim, deficits would rise by up to 1.5
percent of the country's G.D.P.
ONE WAY TO USE THE MARKET
One rationale for privatization is that workers would get a better return on
their money in Wall Street securities than with Social Security's dowdy old
Treasuries. This notion, which has Wall Street investment banks salivating, was
especially in vogue during the 90's, when the stock market was soaring. When
the bubble burst, advocates reined in their sales pitch, but they still are
unrealistically sanguine. Last year, Tanner of the Cato Institute wrote that
''over the worst 20-year period of market performance in U.S. history . . . the
stock market produced a positive real return of more than 3 percent.''
Actually, the market has done worse than 3 percent per annum in nine different
20-year periods.
In any case, Social Security could capture the return on stocks, without
putting individuals at risk, by investing in equities directly. This would also
achieve another frequently stated objective: keeping the government's hands off
the Social Security trust fund. That option would be far more efficient, in economic
terms, than separating the money into 150 million disparate accounts. Costs are
much lower for one big investor. And more important, in a system of individual
accounts, benefits will vary with individual choices, and some people will make
poor ones. In Sweden, where the retirement system has included private accounts
since 2000, the majority of Swedes made excessively risky investment choices by
putting money into stocks at the market top, according to Richard Thaler, a University of Chicago behavioral economist.
Finally, pooling the investment pools the risk, and thus reduces the danger of
retiring at the wrong time. In a system of personal accounts, someone who
retired after a market crash would be out of luck.
So it is notable that all the current proposals to privatize involve the
economically inferior option of individual accounts. But privatization
advocates aren't motivated solely, and perhaps not even primarily, by
economics. Glenn Hubbard, Bush's former top economic adviser, wrote in Newsweek
that an ''obvious objective'' of privatization is ''to advance the president's
ownership society agenda.'' Such pro-free-market sentiment has a long lineage.
Remember Senator Vandenberg, who fretted in the 30's that public ownership of
private securities would amount to socialism? Even though state pension funds
and some U.S. agencies, including the Federal Reserve, put some pension money
in stock-index funds, conservatives still react as if such a solution for
Social Security were akin to turning it over to the Kremlin. Peter Ferrara, a
former White House staff member under Reagan and now senior fellow at the
Institute for Policy Innovation, who has been proposing Social Security
privatization plans since the late 1970's, told me that economics ''was not my primary
motivation. It was ideological. We don't want the government controlling that
much investment.''
HOW BUSH WOULD CUT BENEFITS
There is a policy choice that unites Social Security's critics -- from
Goldwater to Reagan to Bush -- which is that the program should be balanced by
shaving benefits rather than by raising taxes. They favor smaller government,
so shrinking Social Security (rather than increasing its financing) serves
their broader aim. Indeed, though the public continues to oppose cutting benefits,
Bush has ruled out any solution that involves a tax hike.
Reagan said the program had morphed from the humble insurance plan
formulated by F.D.R. (for whom he voted four times) into a swollen caricature
of government excess. The first Social Security recipient, a legal secretary in
Vermont named Ida Fuller, started with a benefit of $22.54 a month. Today's
retirees obviously do better (even after adjusting for inflation). Nonetheless,
according to Lawrence Thompson, who was the Social Security acting commissioner
in the 90's, the retiree program is not really more ''generous'' now than it
was in the past. Like other pension systems, Social Security was designed to
replace a fixed portion of a retiree's previous earnings. For a single person
with average earnings, initial benefits were intended to replace about 40
percent of income. They are still pegged to 40 percent of income.
Since wages generally rise faster than inflation, retirees in each
generation get more in real dollars than those in previous ones. Contemporary
critics, like Kasich and the Bush council, would slow the rate of future
increases by linking benefits only to inflation. Though this would save a lot
of money, its effect on retirees should be understood.
Seniors now get an initial benefit that is tied to a fixed portion of their
pre-retirement wages. If the index was changed, their pensions would be pegged
to a fixed portion of a previous generation's income. If this standard had been
in force since the beginning, retirees today would be living like those in the
1940's -- like Ida Fuller, which would mean $300 a month in today's dollars, as
opposed to roughly $1,200 a month.
One way or another, societies with more old people have to devote more
resources to them. Right now, benefits amount to 4.3 percent of G.D.P. The
trustees' most likely projection assumes that over the next 75 years that
figure will rise to 6.6 percent. In the more optimistic case, benefits will
rise to 5.2 percent. Given the substantial increase in the elderly population,
neither of these figures seems rash or out of proportion. The increased cost
would be on a par with that of making Bush's first-term tax cuts permanent,
which is projected to be about 2 percent of G.D.P.
And though future generations of workers will have to support more retirees,
they will also be having fewer children. In fact, according to the Social
Security actuaries, the total ''dependency'' burden (that is, the number of
nonworking seniors and kids that each working-age adult will have to support)
will remain lower than at its baby-boom peak. ''In a grand social sense,'' says
Thompson, the former Social Security commissioner, ''we can support more
seniors where there are fewer people in day care.''
THE INESCAPABLE COSTS OF AGING
Ultimately, every 75-year forecast is just a guess, and therefore every
approach must accommodate a range of possible outcomes. Plans that link worker
benefits to the stock market automatically adjust -- if the economy
underperforms, then workers get lower benefits. This enhances, rather than
mitigates, whatever is the trend in people's private savings. As Thompson says,
''The default adjustment is you eat less.'' This could be brutal and also
unfair, especially to the post-1983 generation of workers that, on the say-so
of Greenspan and Reagan that the trust fund would be honored, has paid a
sacrifice in both reduced benefits and higher taxes.
What other solution is there? Ball, who joined the system in 1939 as a
$1,620-a-year district officer in Newark, has thought of one. He starts from
two premises: it would be reckless not to make some adjustments now, but
foolish to make too much of 75-year prophecies. ''In 1928, there was no way to
forecast the Depression, World War II, the birth-control pill. We have to stop
acting as if 75-year estimates were absolute,'' he told me.
Nonetheless, Ball would tweak the system in several modest ways to reduce
the projected deficit. For instance, he would very gradually raise the cap on
income subject to the payroll tax, now at $90,000. This would reverse a recent
regressive trend. Income distribution in
The 2004 ''Economic Report of the President'' takes dead aim at such an
approach. It reckons that all pay-as-you-go systems will eventually be doomed
by demographics, and that solutions like Ball's will only push back the date
that the trust fund runs out of money by a few years. The White House worries
that any fix that covers 75 years of benefits could still bequeath a deficit in
the 76th year. ''The nation must act to avert a long-foreseen future crisis in
the financing of its old-age entitlement programs,'' the report states. Its
assumptions may be true, or they may not be, but the conclusion suggests a
misplaced allegiance: We have an obligation to the distant future, but don't we
owe a greater debt to the current generation and to those that immediately
follow?
Prudence dictates taking steps now to minimize the possible shortfall. This
could include raising the cap, some modest cuts and tax increases and a gradual
redeployment of the trust fund into assets that may not be tapped, willy-nilly,
for whatever legislative purpose. But only a real crisis would dictate undoing
an institution that has provided a safety net for retirees, that has helped to
preserve in the social fabric some minimum of shared responsibility and that
has been supported by workers in good faith. And, in looking at Social Security
today, the crisis is yet to be found.
Roger Lowenstein is a contributing writer and the
author of ''Origins of the Crash.'' His last article for the magazine was about
presidents and job creation.