Finding the Truth About the Social Security Debate

AFTER DECADES OF POLITICIANS STUDIOUSLY AVOIDING any debate about the future of Social Security, the issue has suddenly become central to this year’s presidential election. Both Texas Governor George Bush and Vice President Al Gore have very different proposals that claim to deal with Social Security’s impending financial crisis. The next several months will see charges and countercharges about the cost of this and that, or whether it is riskier to set up personal retirement accounts or to do nothing. For most people, the debate will be confusing unless they keep in mind a few basic facts.

The reason for this is simple. Social Security is an extremely popular program, but very few people actually know how it is funded or managed. Despite the fact that this debate could determine retirement incomes for millions of Americans, the press has done little to fill this knowledge gap.

As a result, efforts to scare people away from a real reform that allows workers to invest some of their Social Security taxes in a personal retirement account could succeed. Here are responses to what critics will say against Social Security reform.

The Critics: There really isn’t a problem. Social Security is solvent until 2037, at least. Besides, this is just an economic projection, and it could be wrong.

The Facts: The Social Security Administration (SSA) itself says that the retirement program will begin to spend more money than it takes in by 2015. From then until 2075, they never expect it to run a surplus again. This problem is serious. According to SSA, when my 14 year old daughter retires around 2050, Social Security will run a $240 billion annual deficit (in 1999 dollars). When her kids retire around 2070, that annual deficit will have grown to over $500 billion. Economic projections can be wrong, but this one is considered to be fairly reasonable, and it would be irresponsible to ignore this warning. If the exterminator shows you that termites are in your house, it is much cheaper to fix the problem now than to just hope they go away.

The Critics: If the economy grows just a bit more, the problem will be solved.

The Facts: Actually, just the opposite is true. Increased economic growth makes the program solvent for only two additional years. It still starts to spend more than it receives by 2017 and never goes back into the black. Also, because individual incomes grow, SSA will have to pay more in benefits after several decades. SSA uses a “best guess” economic projection to determine Social Security’s future health. Increasing that projection by almost 60 percent slightly delays the inevitable, but does not solve Social Security’s problems.

The Critics: All we have to do is to raise taxes just a bit more, or reduce benefits slightly.

The Facts: SSA says that the average deficit Social Security faces between now and 2075 is about 2 percent of income. However, averages are misleading. The program is in surplus until 2015, and runs ever increasing deficits after that.

The longer we wait the higher the bill for reform. The US General Accounting Office says that waiting until 2034 would require a 38 percent tax increase or a 28 percent cut in benefits. By 2075, that grows to a 49 percent tax increase or a 33 percent cut in benefits.

The Critics: Any Social Security reform will mean lower benefits for current retirees.

The Facts: This is completely false. All responsible reform plans guarantee that current retirees and those close to retirement will not see any changes to their benefits. This is true for both the Bush plan and the Gore plan.

In fact, both plans will probably result in enough money to pay benefits for someone who is already retired. The surpluses between now and 2015 should guarantee that. The real question is what happens to our children and grandchildren. They face either higher taxes or lower retirement benefits unless Congress acts soon.

The Critics: The Gore Plan’s “Retirement Plus” accounts will take care of the problem.

The Facts: Unfortunately, this is not true. These accounts would in effect establish a new entitlement program and give people below a certain income level government matches to any money that they save. Saving money is a good thing at any time, but the Gore accounts do nothing to reduce Social Security’s coming deficits. The $240 billion deficit that my daughter will face in 2050 would not change at all if Retirement Plus accounts are established.

The Critics: If money goes into personal retirement accounts, Social Security will have financial problems sooner.

The Facts: This is similar to refinancing a house. There is an up-front cost that results in major savings in the future. Similarly, Social Security transition costs are a real issue, but the modest cost is better than the alternative. Social Security currently runs enough of a surplus to allow people to put an amount equal to 2 percent of income in a personal retirement account. However, in a few years that will change and the program will run a deficit sooner than under current law.

SSA estimates that the retirement program will run a cumulative $21.6 trillion deficit between 2015 and 2075. It also estimates that the total cost of various existing reform bills would be between $3.5 trillion and $6 trillion. Under reform, the costs come sooner, but the total is much less. Isn’t it worth a small sacrifice to make sure that our children and grandchildren have the same retirement security that older people do?

The Critics: Putting more money into the trust fund will solve the problem.

The Facts: Social Security’s trust funds are filled with special issue US Treasury bonds. President Clinton’s own Office of Management and Budget said that the only way to repay those bonds is to a) collect more taxes, b) reduce benefits, c) reduce other spending, or d) borrow the money to repay the bonds. In other words, using the trust fund to pay benefits will require higher taxes, a higher national debt, or reducing other spending. The amount of bonds does nothing to reduce Social Security’s annual deficits. The $240 billion annual deficit my daughter will face would still be $240 billion.

The Critics: Investing in the stock market is too risky.

The Facts: There is a huge difference between investing in specific stocks and investing in an index fund made up of several hundred stocks. Also, retirement savings are held for long periods of time instead of being traded on a regular basis. In other words, the index funds are bought, and then held, not shifted into the latest financial fad. Individual stocks are quite volatile, but over 20 years or so, stock index funds have always gone up. Ibbotson Associates, a noted stock market research firm, has proved that the market has gone up for every 20 consecutive year period since 1926. This includes the Great Depression.

The Critics: Personal retirement accounts will mean lower Social Security benefits.

The Facts: Quite the opposite is true. When my 14 year old daughter retires in 2050 or so, SSA says that the average monthly benefit will be about $1,429 a month (in today’s dollars). However, the program will only take in enough then to pay $1,056 a month (unless there is a huge tax increase).

If my daughter could invest all her Social Security taxes in a mixture of stocks and bonds paying about 5 percent a year after inflation, she would have almost $1 million more to finance her retirement. A personal retirement account will allow every American to share in our economic growth and to have a better retirement income.

The Critics: Personal retirement accounts cannot earn enough to make up the gap between what Social Security would pay and today’s benefit levels.

The Facts: This is simply not true. Personal retirement accounts will only have to pay about 4.2 percent annually to make up the difference.

Looking at my 14 year old daughter, when she retires around 2050, SSA says that its average monthly benefit will be $1,429 (in today’s dollars). That year, Social Security will only take in enough to pay $1,056 unless there is a huge tax increase. If an amount of taxes equal to 2 percent of income is diverted into personal retirement accounts, Social Security can pay only $870 a month from the taxes that it receives. If her personal retirement account earns only 4.2 percent a year, her total Social Security income would equal the full $1,429 a month. If it earns more, her Social Security retirement income would go up. (By the way, a very conservative account with 50 percent government bonds and 50 percent stock index funds would earn an average of 5 percent. An account entirely invested in stock index funds earns an average of 7 percent.)

The Critics: Administrative costs will eat up most of the savings. All this does is enrich Wall Street.

The Facts: Actually, Wall Street has limited interest in this issue because the profits would be so low. Last year, State Street Trust, a major pension manager, estimated that a simple personal retirement account plan would cost between $3.38 and $6.58 annually. Many people pay more than that each month for just a checking account. In addition, the federal government’s retirement plan allows people to invest in one of three funds at an annual cost of about $0.10 for every $100 invested. Opponents of reform point to the cost of other accounts, but the ones they choose tend to be more elaborate and customized than is necessary for a Social Security-related account.

Separating truth from political rhetoric is difficult, but important. This debate will be crucial to our nation’s future. This is not a debate about current retirees; their future benefits are assured. Stripped down to the basics, it is about how to increase retirement security for Americans of all ages. It is about whether our children and grandchildren will have the same opportunities that we have or be forced to pay ever higher taxes.

Essentially, there are only three ways to resolve Social Security’s financial problems: we can 1) raise taxes, 2) cut benefits, or 3) make Social Security taxes earn more by investing the money. There is no other way to “save” Social Security. Any candidate who opposes one of these solutions must support one of the others. The only way to avoid raising taxes or cutting benefits is to allow personal retirement accounts.

Over the next several months, candidates will attempt to “spin” the issue to make it look like there are other solutions. There are not. It would be much more comfortable to avoid making hard decisions about Social Security, but it would be irresponsible.


Mr. John is a Senior Policy Analyst on Social Security at The Heritage Foundation.