Social Security Essay, Research Paper

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Josh A. Abbott

Professor Adams

Principles of Microeconomics

14 November 2000

Financial Concerns About the Future of Social Security

“Will Social Security Have future financial difficulty?”

In my view, Social security doesn’t face a true financial crisis. But it does face a crisis of confidence among younger workers. One widely publicized survey showed more young workers believed in UFOs than believed Social Security would pay them full benefits when they need them. By the time young workers, such as myself, reach the retirement age; confidence should be very high in Social Security, not low. This is just one of the problems overlooked when discussing issues on the future retirement plan.

This crisis of confidence is the strongest argument to allow workers to invest part of their payroll tax in private accounts. Social Security gives today’s workers just a 2 percent return on their investment (Bulling 21). Giving them a better rate of return, even the 4 or 5 percent they could get from federal bonds, would obviously help their retirement. But it would also empower workers. Workers would control their private plans and might, for example, choose to spend just their dividends and leave their stocks to their heirs.

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When Social Security was launched in 1935, in the middle of the Great Depression, there was no way to fund it like a normal retirement program by setting contributions aside for 40 years before paying out the first benefits. Instead, President Franklin D. Roosevelt opted to tax active workers and use that money to pay benefits to people who were already at or near the normal retirement age of 65 (Erickson).

That plan was a prize for the original retirees and those who followed in the first few decades of the program. But the system of using most of today’s taxes to pay today’s benefits will come under severe strain when baby boomers begin to retire in 2015, and the surpluses now piling up in the system begin to decline. By 2037, some experts think those surpluses will be gone and taxes coming into the system will only be adequate to pay 70 percent of promised benefits (Erickson).

It’s worth noting that those projections are based on extremely pessimistic, “worst case” scenarios, and the booming American economy already has caused the supposed “day of reckoning” to be pushed back repeatedly to its current 2037 date. But critics who moan that the system is ruined overlook an even more important fact: No law of God or man says that Social Security benefits can only be paid from the current, and extremely regressive, Social Security payroll taxes. If there truly is a Social Security shortfall in 2037, the federal government could use general revenues to supplement the fund. The government also could borrow money to pay Social Security benefits in 2037- just as it

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has borrowed in the past to pay for everything from aircraft carriers to hydroelectric projects.

Even if the federal government had to divert an additional $1 trillion of general tax revenues to Social Security over the next 40 years, that sum would be less than one-half of one percent of projected federal revenues over that same 40 years (Bulling 25). That’s a modest price to restore public confidence in America’s most important social program.

Until recently, all sides in the debate over Social Security reform agreed that this moment of economic prosperity is the right time to fix the nation’s ailing retirement system- that we should “fix the roof while the sun is shining,” as President Clinton put it. But now an increasingly vocal minority of people is denying that the roof even needs fixing and questioning whether the “rain will ever come” (Austin).

To these “crisis deniers,” Social Security’s problems are simply the product of pessimistic economic assumptions. If the economy grows faster in coming years than the 1.7 percent projected by the program’s trustees, Social Security becomes “a crisis that doesn’t exist, ” according to Rep. Jerrold Nadler (D-N.Y.). Even Vice President Gore got on board, saying, “If Social Security ain’t broke, why fix it?” Gore offers a Security storm is gathering strength, and the longer we put off preparation the worse the damage will eventually be (Austin).

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Politicians aren’t the only ones doubting the Social Security crisis. Financial columnist Jane Bryant Quinn went from saying in 1998 that “we can’t drag our feet any longer on Social Security reform” to today calling herself “the only kid in the village who’s not crying wolf.” In an editorial, Business Week said the Social Security trustees’ “ridiculously low” economic projections make the reform debate a “phony problem” (Bulling 29).

But tow expert panels found just the opposite. Accounting giant PricewaterhouseCoopers examined the Trustees’ projections at the request of Rep. Nadler and concluded that the “methods used in preparing the long-range? projections of the Social Security trust funds were sound and the assumptions used in preparing the projections in the Trustees’ report were individually reasonable” (Bulling 20).

A nonpartisan panel of government-appointed economists and demographers went further, finding the trustees, if anything, optimistic about Social Security’s future. The trustees greatly underestimate increases in life expectancy. If people live as long as expert demographers predict they will, the retiree population will swell and Social Security’s $20 trillion long-term deficit would increase by one quarter (Wells).

Even so, Dean Baker and Mark Weisbrot, authors of “Social Security: The Phony Crisis,” claim that “using any remotely realistic projection for the growth of wages

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and the economy, the Social Security system will be solvent into the stratosphere of America’s science-fiction future.” Well, let’s look at the numbers. For Social Security to stay technically solvent until 2075, wages would have to grow 2.9 percent annually above

inflation. That is 3.7 times faster than over the past 30 years, and 41 percent faster than during the booming 1960’s (Wells). — “Technically” solvent means little, since the Social Security trust fund is not a true savings vehicle but a mere bookkeeping account full of IOUs—-something even the Clinton administration, in a moment of candor, was forced to admit.

Then there’s the fact that the more workers earn and pay in taxes, the more they are owed in retirement benefits. So it’s almost impossible to use economic growth to get ahead of the game. Social Security solvency into the “science-fiction future” demands truly science-fiction levels of economic growth.

How do we prepare for a future with fewer workers and more retirees? How do we build confidence in young individuals minds about Social Security in the future? The key is saving, and the best way is through personal retirement accounts: Allow today’s workers to invest a portion of their payroll taxes in accounts similar to IRA’s and 401(k)s, where money will rapidly accumulate to help pay future benefits.

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Social Security’s problems are not “greatly exaggerated.” In fact, independent studies show precisely the opposite to be true. If tomorrow’s retirees hope to enjoy a secure retirement, Social Security must stop simply redistributing wealth and start creating it. This is the only way confidence and success will be derived from Social Security.

Bibliography

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BIBLIOGRAPHY

Austin, Marsha J., “Candidates differ on Social Security,” Denver Post Home Page,

October 1, 2000,

(November 8, 2000).

Bulling, David, Jr., “Social Security: A Problem?” Business Week, May 29, 2000, pp.

19-31.

Erickson, Dinah J., “Saving Social Security,” Chicago Tribune. Home Page, November

13, 2000,

(October 25, 2000).

Wells, Andrew G., “Wishful Thinking on Social Security,” Today’s Commentary. Home

Page, September 14, 2000,

(September 19, 2000).