Social Security's Path to Survival
A Solution in Search of a Problem
There are as many proposed solutions to the Social Security "problem" as there are social security recipients. Those who believe in a private investment solution have ignored statistics that indicate there might be insufficient fixed income investments at appropriate interest rates that can guarantee retirees will receive a higher income after the conversion of "growth" securities to income producing securities.
The Private Investment Solution
The arguments for private investment of social security funds have recipients gaining more income, and by saving their investments, bequeathing wealth to descendants. This latter advantage contrasts with the present social security system, which operates similar to a pension plan or as a quasi annuity. The private investment plan has many faults, all of which have been noted by detractors: costly, uncertain, risky and difficult to place in operation without bankrupting the present plan. Another significant aspect has been ignored; can the financial system support a private investment plan?
Sometime after retirement, the accumulated investment assets must be converted to fixed income to replace the income benefits normally derived from social security. The private investment plan promises more income than the average Old Age Assistance benefit, which is ~$11K in 2003. An analysis of the worth of this prediction depends upon assumptions. Let's make some assumptions:
Considering the investment risk, anything less than $15K would be unacceptable; so let us take that figure as an average promised income for future retirees, all of whom have private investment plans. Let's assume an interest rate of 5% (a fair mix of high income funds, government bond funds and Ginnie Mae finds). Given these parameters, social security recipients would have to save an average of $80,000 invested at 5%, in order to have an average income of $4K from investment ($11K still from Social Security). With ~40,000,000 retirees in the future, total fixed income assets for investment would have to be $3.2 trillion ($80K times 40 million). an unrealized sum unless assets become highly inflated. The year 2000 had 15 trillion dollars in the U.S. fixed income market and about 3.5 trillion dollars in U.S. securities. Only a minor portion of the more safe investments of the fixed income market has interest rates of >5%.
The retired social security beneficiaries will not be the only buyers of the fixed income securities. Increased investment demand will drive up fixed income securities prices and drive down rates. Also, the employed, through their Keogh plans will be buying the securities that the retirees sell to gain the assets for fixed income investment. In effect, the employees of the day, will be maintaining security prices and financing retirees, just as they do today. The proposition that investment of social security funds can assist in maintaining the social security fund (an apparition) and yield greater benefits for retirees might prove counter-productive - it could misalign the nation's financial base.
The investment solutions of all types arise from the proposition that the present Social Security plan will soon go bankrupt and retirees will lose much of their benefits. Verifiable data counters those assumptions.
Is the Social Security System in Trouble?
The anguished commentators of the present Social Security System stress its supposed built-in failures:
- As the "baby boomers " retire, beginning in 2008, the Social Security system fund will soon be depleted.
Truth: Cost "first exceeds the income rate in 2018, producing cash-flow deficits thereafter. Despite these cash-flow deficits, beginning in 2018, redemption of trust fund assets will allow continuation of full benefit payments on a timely basis until 2042, when the trust funds will become exhausted." (2004 OASDI Trustees Report)
- There will be insufficient workers to finance the retirees.
Truth: The ratio of retirees to workers is one part of a ratio that should include all non-workers; wives, children, other family members. In the year 1950, the ratio was two non-working persons for one worker. With smaller families and women working, the ratio shrunk to about 1.2:1 in year 2004, still less than in 1950. (http://www.panix.com/~dhenwood/AntisocInsec.html) The ratio is forecasted to decrease slightly in the coming years and then rise slightly during the century. When did retirees leave the family and not be allowed care by their children? Will workers be unwilling to support their parents who are also those that worked and created the institutions and economy that allows for future workers.
- Making the Social Security system solvent will be costly and require a decrease in benefits.
Truth: A variety of analyses challenge this assumption. Solvency can be obtained form a combination of measures that don't drastically increase the Social security payroll tax or decrease its benefits. Most of these measures are outlined in a report: Reforming Social Security: A Balanced Plan by Peter R. Orszag and Peter A. Diamond, December 2003
Brookings Institution Policy Brief #126
Their report indicates that a modest and slow increase of payroll taxes from the present 6.2% to 7.09% in 2055 (same for corporate contribution) and a modest 8% decrease in benefits by the same year maintain the system solvent. Other measures can assist - use inheritance taxes, shift government spending, increase retirement age, increase payroll tax on wealthy, enter all government employees (federal, state and municipal) in the Social Security system.
Omitted from the Rhetoric
The present Social Security system has other advantages:
- It is simple and easy to manage.
- Administrative costs are low - between 0.6% and 1% compared to England where the program costs are 15% and Chile where they are even higher.
- It has minimal fraud.
- It has no broker fees.
- Benefits are known.
- It supports other programs such as Medicare and disability Insurance.
The present Social Security system might not be the best system, but for its purpose, it's the best system we have. The government should calculate a fair wage for retirees and gather revenue to satisfy that wage. The principal problem isn't helping retirees to live economically; it is is helping them to live healthfully - living and dying without pain. If the Bush administration perceives Social Security as an investment vehicle, it will weaken another pillar of American strength, chipping away at a base that the Bush administration has made more fragile with each passing year and which the president has already brought close to collapse.
The present social security system approaches a national pension plan, with the government administration of revenues collected from payroll taxation. When the fog of rhetoric clears, we might learn this might not be the ideal system, but for its purpose, it's the preferred system. Social Security has become a solution looking for a problem.
updated: february 2005