What's Next for Social Security?
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It was just over one year ago that President Bush, fresh from his re-election victory, announced that substituting private accounts for a part of Social Security's guarantee would be a top priority of his second term. In so stating, President Bush broke ranks with every former president, Republican and Democratic alike. All had understood the value and importance of Social Security.
Even President Bush's own father said in his 1990 State of the Union address, "To every American out there on Social Security, to every American supporting that system today, and to everyone counting on it when they retire, we made a promise to you, and we are going to keep it the last thing we need to do is mess around with Social Security."
The current president spent much of 2005 warning that "the crisis is now" for Social Security. His headline-grabbing, alarmist rhetoric stirred up a great deal of anxiety but no concrete action. President Bush's Social Security proposal appears dead, at least for now.
But the president has made clear that he is not giving up.
As recently as Tuesday, Jan. 23, President Bush said, "Last year I talked about doing something about [Social Security], and the Congress didn't do anything about it. So this year I'm going to talk about doing something about it, and the next year something about it, and the next year something about it."
Moreover, Social Security does have a projected long-range deficit which has not yet been addressed. What will happen next? What should happen?
President Bush has argued that Social Security is a Depression-era program that is out of date, fundamentally flawed and in need of modernization. The truth is that Social Security was enacted during the Depression, but it was not made for the Depression.
In order to give workers time to become insured, the Social Security Act of 1935, which created the program, provided that monthly benefits would not begin for seven years after the 1935 enactment -- until Jan. 1, 1942, a date more than 12 years after the stock market crash of 1929.
President Roosevelt recognized that to get immediate assistance to people in need -- to alleviate the immediate suffering caused by the Depression -- there was no alternative to means tested welfare, and so Congress enacted that as well. But for the long term -- once the Depression was history and the economic health of the country was restored -- the president wanted a system of insurance in place to guarantee for posterity that every American would have a reliable, stable source of income to replace wages once workers became too old to continue to work. (It has since been expanded to replace wages lost as a result of death or disability.) The idea was to keep middle-income workers from falling into poverty once wages were no longer there.
President Roosevelt's vision is as relevant and important today as it was then: As long as people are dependent on wages, Social Security is necessary. As Sept. 11 so starkly demonstrated, tragedy can hit anyone at any time. Today, the 9/11 families receive monthly Social Security benefits, which replace the wages of their loved ones who perished. Social Security is in place so that American workers and their families for all time will have a reliable, stable source of income to replace wages in the event of death or disability.
Moreover, in a world where the private pension system is in trouble, where major companies like IBM are freezing or terminating their plans and where savings are at their lowest rate since the 1930's, Social Security's rock-solid guarantee of a floor of protection in retirement is more necessary than ever. What about the claim that Social Security is unsustainable, as President Bush has argued? President Bush claims, every time he talks about the subject, that Social Security is a victim of the aging baby boom, reflected in the ratio of workers to retirees, which used to be 16 to 1, is now 3 to 1, and in 2030, will be 2 to 1.
The truth is that today's projected deficit has nothing to do with the size of the baby boom or worker-to-retiree ratios. The 16 to 1 ratio is a meaningless factoid plucked from 1950, a year when Social Security was expanded to cover millions of new workers. The ratio never influenced policy in the slightest. It is the kind of ratio experienced by all pension plans, public and private, at the start when few workers have yet qualified for benefits.
The 3 to 1 ratio has been the case for the last three decades or more. The future 2 to 1 ratio is meaningful and does translate into higher costs, but those costs were addressed decades ago. Congress has enacted 10 significant Social Security bills since 1950. Every enactment has taken into account the baby boom, and each has left the program in long-run actuarial balance. The most recent enactment was in 1983, when the program was in balance through 2057 -- the year the youngest boomers, those born in 1964, will turn 93.
How social security went from a projected surplus through 2057, when most of the baby boom will be dead, to today's projected deficit involves a number of factors, mainly related to changes in assumptions about wage growth, productivity and disability rates. The change from surplus to deficit is totally unrelated to the number of baby boomers, as one would surmise. After all, no new baby boomers have been born since 1983.
Although President Bush tries to scare people about the future, in reality, Social Security's projected shortfall several decades away is one of the easiest problems facing the nation. The solution simply requires balancing income and outgo for the long run, and there are several ways to achieve that balance. I favor three changes -- gradually restoring the maximum taxable wage base to where it was historically, covering 90 percent of all wages; converting the residual estate tax to a dedicated Social Security tax; and diversifying Social Security's investment portfolio, so that it is invested in stocks as well as bonds.
All of these are good policy in their own right and, together, solve the deficit. They involve no benefit cuts, no increase in the payroll tax rate, and, for that matter, no increase in taxes at all for about 94 percent of all American workers. The real issue for Social Security is one of politics and perception, not economics and the aging population. It is imperative that, in 2006, Americans elect political leaders who are committed to Social Security. An understanding of the history of Social Security makes clear that despite President Bush's rhetoric about strengthening Social Security, his proposal is simply the latest battle in a longstanding ideological war -- one that has raged for 70 years -- between supporters and opponents of the vital American institution.
Now is the time to get those running for Congress on the record: before the election. All politicians will claim they are for Social Security, but a few simple questions will determine whether they are telling the truth. Ask whether they are for or against private accounts and other radical transformations of this vital American institution, whether they will fight proposals to cut benefits, and whether they support Social Security's basic philosophy and structure, which have been a part of the program since its beginning.
The opponents of Social Security are on the ropes. For the sake of the country, it is time to deliver the knock-out punch next November and finish the fight.