Two pieces of good news were announced recently. First, the nation's economy grew an unprecedented 7.3 percent during the last quarter of 1999. Second, due in part to this tremendous growth, the Social Security trust fund is predicted to have an extra three years of life, pushing back the projected insolvency date to 2037.
But is this really good news? Not if it means dampening the push for Social Security reform. Whether the trust fund runs out in 2034 or 2037 is more or less academic. What is more important is that Social Security is a "pay-as-you-go" program. Today's workers pay the benefits for today's retirees.
Unfortunately, the ratio of workers to retirees is shrinking as people are living longer and having fewer kids. For example, in 1945 two seniors were collecting benefits for every 100 workers paying the Social Security tax. By 1999, this number had increased to 30 beneficiaries for every 100 workers. The Social Security Administration projects that by 2075 there will be 54 seniors collecting benefits for every 100 workers paying the bill. That's fewer than two workers to support every beneficiary.
This demographic dilemma cannot be solved by economic growth alone. By 2015, workers' payroll taxes won't be enough to pay all Social Security benefits. That is when the trust fund, which holds special government bonds, is supposed to make up the difference. However, to redeem the bonds, the government must either raise taxes or borrow. The effect would be disastrous. Any major increase in taxes is likely to lower national productivity and the incomes of future generations. Similarly, any substantial cut in benefits will lower the standard of living of future retirees.
It doesn't have to be that way. The best way to avert the demographic dilemma is to allow workers to put a portion of their payroll tax dollars into personal accounts invested in the private market. This would fundamentally change the nature of the system from pay-as-you-go to self-funded. Social Security could be saved without raising the taxes of workers or cutting the benefits of seniors.
Unfortunately, optimistic reports from the trustees only help those who would hold the needed reform hostage to politics. President Clinton, for example, responded to the trustees' report by telling Democrats at a fundraiser that Republicans didn't want to want to shore up Social Security because they want to privatize it – as if the two were mutually exclusive.
Reforms have been thwarted for years because of such scare rhetoric. But sooner or later our political leaders are going to have to face up to reality, and do something. It will either happen because of a financial crisis, or because of political pressure generated by average Americans who finally realize how better off they would be under a private system.
The second scenario is more likely, as more people log onto the Internet and access the volumes of bipartisan research and online tools that are available to both educate and personalize the financial realities facing the system.
One of these tools is an online benefits calculator developed by my colleagues at the National Center for Policy Analysis that allows workers to determine their personal stake in Social Security. The calculator – which can be accessed at www.ncpathinktank.org – shows people what they will pay in taxes, what they will receive in benefits, and what they would have received if they had invested the same dollars in a private account. It shows everyone how they will benefit – not just investment bankers.
Take a typical 25-year old waitress, for example. According to the NCPA's calculator, she can expect to pay more than $300,000 (in real terms) in Social Security taxes by the time she retires, but her lifetime benefits will be little more than half that amount. Her monthly Social Security benefit will be $920 in today's dollars, compared to a private pension of $2,303 if her taxes had been conservatively invested in stocks and bonds.
Education, motivation and participation. That's what it will take to reform the system, and there is no time to be complacent.
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The National Center for Policy Analysis is a public policy research institute founded in 1983 and internationally known for its studies on public policy issues. The NCPA is headquartered in Dallas, Texas, with an office in Washington, D.C.