Boomer burden
The debate is joined over reforming Social Security
Either way, of course, no one would want to depend on either system for the bulk of retirement income. The low figures should prompt any sensible person to set aside as much as possible in 401(k) and other retirement accounts. And if some form of privatization occurs, investors will have to look at their total retirement savings portfolios to make sure they have the right asset mix; Social Security should be considered part of the fixed-income portion of your retirement money. If you elect to put some of it into the stock market, then you may well increase your overall exposure to equities beyond what you had intended.
The CBO also projects that the economy could be about half a percent larger by 2025--and about 3 percent to 4 percent larger by 2080--than it is under current Social Security law because of higher private investment levels.
The most commonly highlighted downside is the $1 trillion-plus transition cost needed to fill the shortfall once money is diverted from Social Security to private accounts. But many see this as a political, rather than a budget, problem since the government is simply recognizing a future debt and putting it on the books now. A stickier issue concerns just how much those private accounts can be expected to earn and whether individuals will make appropriate investment choices. Most privatization advocates use similar numbers as does the president's commission, an inflation-adjusted return of 3.3 percent for bonds and 6.8 percent for stocks, which is how these asset classes performed during the 20th century. But Jeremy Siegel, author of Stocks for the Long Run and a finance professor at the Wharton School, predicts that future equity returns may be nearly a percentage point lower.
Begin cutting benefits and raising taxes now. Call this the Pain Proposal. Peter Diamond of the Massachusetts Institute of Technology and Peter Orszag of the Brookings Institution propose increasing combined employer-employee payroll taxes from 12.4 percent to 15 percent over the next 75 years as well as instituting a 3 to 4 percent payroll tax on earnings above the current taxable maximum of $90,000. They would also calculate the cost of increased life expectancy to Social Security and offset that cost through gradual benefit reductions. The CBO projects that scheduled benefits would be cut from their present level by 2 percent in 2025, 12 percent in 2050, and 23 percent in 2105. On the plus side, those new taxes and benefits cuts would mean the system would stay in balance without subjecting workers to the vagaries of the financial markets.
To some, the biggest problem with this proposal is that it penalizes younger workers. "If your only goal is the solvency of the existing system, it is possible to raise taxes and/or cut benefits enough to do that--but then you are going to make Social Security an even worse deal for younger workers," says Michael Tanner of the Cato Institute. Already, a single middle-class male worker born in 2000 will earn an annual real return on his contributions of only 0.86 percent (not counting spousal or disability benefits). For workers who earn the maximum amount taxed, the real annual return is minus 0.72 percent. The CBO also calculates that the higher tax burden from the plan means the economy will not grow as large in the future.
And while the Diamond-Orszag plan avoids stock market risk, it exposes workers to political risk. Perhaps future taxpayers will be unwilling to pay higher shares of their income for retired baby boomers. And who knows what antics lawmakers will be up to in the future? These are the same spendthrifts, after all, who have been looting the trust fund and promising workers retirement benefits far beyond what the system can currently afford.
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