Boomer burden
The debate is joined over reforming Social Security
But Weisbrot and others point out that the SSA has repeatedly underestimated the trust fund's life span because of its overly cautious economic forecasts. Back in 1997, the agency said 2029 was the year the money would start running out. And that point may be delayed further if the economy outperforms the agency's projections, such as its current forecast that worker productivity gains will decline to a 1.6 percent annual rate by 2012, about half the pace of the past decade. Robert Gordon of Northwestern University thinks a combination of technology and cost cutting will allow long-term productivity gains of 2.5 percent.
Now, rising productivity should fuel higher wages, meaning more money available to fund Social Security. Yet since initial retirement benefits are tied to wages, faster economic growth will also raise future benefits. Social Security could be made solvent through 2078 if current payroll taxes were increased from 12.4 percent to 14.3 percent or benefits cut by 13 percent, according to the agency. Wait until 2042 and payroll taxes would have to be abruptly bumped up to 16.9 percent or benefits cut by 27 percent. "That's ridiculous," says economist Arnold Kling, author of the popular EconLog blog. "I am 50 years old. If you are going to reduce my benefits when I reach 68, tell me now. Don't wait until I am 68."
Even AARP, which has launched a highly visible advertising campaign against private investment accounts, says that while drastic changes are unnecessary, it is better to tweak the system "sooner rather than later to strengthen the program for future generations."
Add private investment accounts and trim benefits. A variety of plans floating around would seek to partially privatize Social Security. The one that many analysts think most reflects the thinking of the White House is the so-called Model 2 plan developed in 2001 by the president's Commission to Strengthen Social Security. The plan would allow workers to invest up to 4 percent of their taxable earnings (with a cap of $1,000 or so annually) in private accounts. Future initial benefits would be based on changes in inflation rather than wages, which presumably would be lower as wages have, in the past, typically risen faster than prices. Under the Model 2 plan, the system would be in balance by 2050, the Congressional Budget Office concluded.
By investing in a fairly conservative half-bond, half-stock portfolio earning a 5.2 percent real return, adjusted by the CBO for risk, a middle-class worker born in 1970 and retiring in 2035 would end up with $13,600 in annual retirement benefits vs. $17,700 under the current system. On the face of it, the current system seems like a better deal. But remember, the only way Social Security can pay that $17,700 is by taking hundreds of billions each year from the regular budget to pay off all those trust-fund IOU s. And that $13,600 from the Model 2 plan would still be more than retirees currently get.
What's more, Social Security is more than just a pension plan--it also provides generous benefits to nonworking spouses as well as financial support to widows and the disabled.
advertisement
