A colleague told me about a casual conversation with two business acquaintances the other day. The two, one in his early 40s, the other in his early 50s, both said matter-of-factly that they didn't think Social Security would still be around when they retired.
About the same time a new poll showed that 51.6% of Americans have the same opinion. And they are right about our pay-as-you-go Social Security system. It's unsustainable in the long run for demographic reasons.
The average woman of child-bearing age must have at least 2.1 children (the fertility rate) to keep the population constant over the long run. The U.S. fertility rate of 2.06 last year was one of the highest among developed nations – and is falling. At the same time, U.S. life expectancy at birth has risen until last year it was 73.7 years for a male and 79.5 years for a female.
Thus fewer babies are being born to grow up to be workers paying payroll taxes; at the same time people are living and drawing retirement benefits longer and longer. As the population ages, it becomes increasingly difficult to pay the benefits of the many who are retired out of payroll taxes collected from fewer current workers.
In 1986, I proposed what I called the Financial Security Program, to protect Social Security by giving Americans the option of contributing part of their payroll taxes to private retirement accounts. These accounts would be invested in the market and would finance part of a person's retirement benefit, thus reducing the burden borne by the Social Security system. I pointed out that the cost of transition from a pay-as-you-go system to a funded system to save Social Security would be costly then, and more costly later, but would spare future generations from having to choose between much higher payroll tax rates or deep cuts in Social Security benefits. I also suggested extending the full faith and credit of the U.S. government to Social Security benefits to protect retirees.
The only thing that has changed since 1986 is that the American people are more aware of the problem and more amenable to a long-term approach that actually saves Social Security instead of delaying the inevitable wreck for unborn generations to deal with. Some respected economists have helped raise this awareness. For example, Federal Reserve Chairman Alan Greenspan said in a 1996 speech, "It is becoming conventional wisdom that the Social Security system, as currently constructed, will not be fully viable after the so-called baby boom generation starts to retire in about 15 years."
Members of Congress from both sides of the aisle have also helped increase public awareness. For example, Senator Bob Kerrey, a Democrat, said, "Each day we let go by means tougher tax increases or benefit cuts for future workers and retirees." And Senator Daniel Patrick Moynihan, also a Democrat, recently said that Social Security as now constituted "is a social insurance program that will disappear before our eyes if we do not reform it now." Letting workers put a percentage of their Social Security payroll tax into personal retirement accounts to be invested in real assets continues to be, in my opinion, the best approach. As these accounts grow, and the magic of compounding increases them still further, the payroll tax revenues needed to fund benefits will decrease. You can see the difference this type of reform can make online at www.mysocialsecurity.org. Several proposals based on this approach have been made by members of Congress of both parties. Nor is the idea of personal retirement accounts a partisan matter. For example, Democratic Senator John Breaux of Louisiana has said, "I believe we have moved the debate past the argument of whether there should be private investment to how private investment should be done. There is a growing consensus that we can strengthen the safety net provided by Social Security, while at the same time providing Americans with more investment opportunities and retirement choices."
Some defenders of the status quo insist that the problem is only a small one, requiring minor adjustments to the benefits paid or the taxes levied. But they are mistaken: the demographic destiny of our current retirement system presents a massive challenge to our economy, our families, and to the Congress.
We must make a choice and make it soon. Either we can make it possible for people to fund their retirement income during their working years, or we can anticipate a ruinous intergenerational conflict that will balkanize America and limit opportunity for everyone.
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