By Dorman E. Cordell
Social Security has always been a pay-as-you-go system. The benefits paid to today's retirees come from payroll taxes paid by today's active workers. That was no problem in 1940, when Miss Ida Fuller got the first Social Security check and when there were 42 active workers for every retiree.
But pay-as-you-go is a problem today, when there are just over three active workers for every retiree. And 35 years from now, it will be even more of a problem when the Social Security trustees expect the ratio to be down to two-to-one.
It's easy to see that something needs to change to save Social Security. Texas Gov. George W. Bush, the presumptive Republican presidential candidate, believes that what is needed is a gradual move away from pay-as-you-go financing of Social Security, and toward letting each worker at least partially fund his or her own future retirement instead.
Bush's campaign Web site merely says he "supports making personal retirement accounts part of Social Security reform." Although Bush hasn't yet spelled out details, he is expected to propose that workers be allowed to divert part of their Social Security payroll tax – probably 1 or 2%, possibly 2.5% – to personal investment accounts. Invested in stock or bond funds – probably index funds – the diverted money plus its market earnings would grow over the years. At retirement, the personal account would replace part of the Social Security benefit paid by the government.
This would also make possible a transition over time to a Social Security system of fully funded personal retirement accounts. Social Security now has something like $12.5 trillion of unfunded liabilities – money it is already obligated to pay current or future retirees – so the transition will take most of the 21st century to complete. Meanwhile, however, the addition of real assets earning real returns would make it possible for Social Security to survive.
With the shrinking ratio of workers to retirees, the alternatives to personal retirement accounts seem to be only three: raise taxes, cut Social Security benefits, or both. Bush says he is against both tax increases and benefit reductions. (He's also, with good reason, against letting the government invest part of the payroll tax in private stocks or bonds. Bush recognizes that there is no way to prevent political meddling in such investments, regardless of attempted safeguards.)
Bush's Democratic opponent, Vice President Al Gore, has already unveiled a proposal that he says would "strengthen Social Security until at least 2050." The vice president wants to make Social Security fairer to widows and mothers – a sentiment that no one is likely to oppose. Unfortunately, Gore's risky scheme would at best only push off the day of reckoning for another generation or so – and even that projection assumes that Congress and the president are going to refrain from spending budget surpluses (if they materialize).
Widows and mothers of the future – along with everybody else – are more likely to be victims than beneficiaries unless we change the system now. Bush's approach recognizes that the best way to make Social Security fairer for an aging population – the only way to ensure that benefits don't go down and taxes up – is to move away from a pay-as-you-go system to a system in which a retiree draws all or part of his or her Social Security benefit from a prefunded account with real assets that politicians can't take away.