Progress On Social Security Reform

As a longtime supporter of Social Security reform, my expectations for President Bill Clinton's national dialogue on Social Security were low. It seemed just another White House PR effort designed to avoid making politically difficult decisions. But I was pleasantly surprised to discover that something substantive actually came out of the first Social Security conference in Kansas City on April 7th.

At that meeting, President Clinton made an extremely important policy concession. He basically ruled out higher payroll tax rates as a cure for the looming Social Security deficit when the Baby Boom generation begins to retire in a few years. "I don't know anybody who thinks that we should try to preserve the status quo program with an increase in the payroll tax," Clinton said. "I think that we ought to admit that we can solve this problem without an increase in the payroll tax."

That is stunning language from the leader of the Democratic Party. The reason this is such an important marker is because once higher taxes are ruled out, it is almost inevitable that something positive will result from any effort to fix Social Security.

Neither Clinton nor Congress have the political courage to cut benefits for current retirees. This means that all of the burden of the coming Social Security crunch must fall on future retirees. The only way they can fairly bear that burden is by giving them a chance to earn a higher return on their Social Security contributions.

Inevitably this means some sort of private market option within Social Security, or a full privatization along the lines that Chile and other countries have already adopted, with workers putting their Social Security contributions in personal accounts like 401(k) plans.

The truth is that the current return on Social Security is abysmally low. Many workers will be lucky just to get a positive rate of return on a lifetime of taxes. This is especially true for blacks and other minorities, who tend to die earlier than whites and thus get back even less from Social Security. Even the American Association of Retired Persons (AARP), a die-hard defender of the Social Security status quo, has admitted that future retirees will get virtually nothing from Social Security.

In its July-August 1995 Bulletin, AARP had this to say about the prospects for those retiring in 2012:

"Unquestionably, people retiring after 2012 will realize smaller returns than today's retirees, a development that's inevitable with the maturing of the system. Unmarried, maximum earners may actually get a negative return on their contributions. For example, a maximum-earning, single worker retiring at 66 in 2015 will need 47.1 years to get back his and his employer's taxes (compared to 25.3 years for a married retiree with a noncontributing spouse).

"Moderate-income workers will do better. A single worker with average earnings retiring at 66 in 2015 will need 29 years to get back combined employee-employer taxes, while a couple with a contributing spouse retiring with average earnings will require 17.1 years."

In other words, under the most optimistic scenario, one only needs to live to 83 to get back all that you have put into Social Security. Under the pessimistic scenario, you will have to live to 113! Little wonder, then, that so many younger workers would prefer to rely on their own saving and investing ability to provide for their own retirement.

Still, some Social Security advocates argue that higher taxes are the answer to its problems. They point out that an increase in the tax rate of a little more than two percent will keep the Social Security system solvent for at least the next 75 years, according to Social Security's actuaries.

The problem is that once one accepts higher taxes even as a partial solution to the long-term Social Security deficit, that tends to become the dominant option. I well remember how that happened in 1977 and 1983 during the last two efforts to fix Social Security, both of which relied almost entirely on higher taxes to keep Social Security afloat. Congress raised the payroll tax rate for Social Security from 9.9 percent on earnings up to $16,500 to a current rate of 12.4 percent on earnings up to $68,400, while leaving benefits virtually untouched.

If Bill Clinton is serious about taking taxes off the table this time, then there is finally a chance to do something fundamental about the structure of Social Security. Reformers should be aggressive in holding him to his no-tax position.