Social Security Isn't Doomed

But too many people now think it is. That's why supporters can't just lie back and say it will all work out

Author: Jane Bryant Quinn

Published: March 29, 2004

March 29 issue - Social Security reformers are totally bogged down. Whether that's good news or bad news, I'm not sure. Most Republicans seek an extreme makeover?diverting some of your payroll tax into a private investment account. Most Democrats say phooey, that's too costly and risky, and anyway the program only needs some tweaks. A few rebels think that everyone is crying wolf: Social Security may not need any fixes at all.

The 2004 Social Security trustees' report, due out this week, shows that full benefits can be paid for nearly 40 years, without skipping a beat. After that, payouts could be reduced by 25 percent, but Congress wouldn't let the program unravel that far. Even if it did, the "loss" wouldn't be as bad as it sounds. Real benefits (after inflation) rise every year for new retirees. Even with a 25 percent haircut, benefits in 2042 will be much higher than they are today, says Dean Baker of the Center for Economic and Policy Research and coauthor, with Mark Weisbrot, of the book "Social Security: The Phony Crisis."

Making guesses about the 2040s seems nuts. It's done only because, by law, Social Security's books have to balance (on paper) over 75 years. Today's projections will be wrong. We just don't know how much and in which direction.

Take Social Security's sacred trust fund. Back in 1994, the trustees expected it to run dry in 2029. Since then, they've pushed the dry-up date back to 2042. Did the program magically improve while we slept? No way. All that happened was that the economy grew faster than projected.

Demographics alone aren't to blame for the trust-fund gap. Social Security taxes were raised and benefits shaved in 1983 to pay for the future boomer wave. What hasn't been covered is the higher lifetime incomes we're getting from Social Security as a result of retiring earlier and living so long.

The thought that Social Security is basically sound may come as a shock. For years all you've heard are scaremongers warning of "looming insolvency" in a program they love to call a Ponzi scheme.

But that's just propaganda, spread by people determined to shake your faith in the government's most popular program. Once you believe that it won't be there when you retire, you'll presumably vote for private accounts. Believers want us to save for ourselves, leaving Social Security to the poor.

The disinformation artists even claim that Social Security costs too much to save. But here's a factoid to tuck away: last year the program's 75-year shortfall came to $3.8 trillion. President George W. Bush's 2001 and 2003 tax cuts equal $9 trillion to $12 trillion. If the tax cuts were pared by a third and those revenues dedicated to Social Security, the "crisis" disappears, says Peter Orszag of the Brookings Institution.

But Social Security's supporters can't just lie back in their lawn chairs and say it will all work out. Too many people now think it won't. Besides, there are still those longer lifespans to pay for, and the sooner we start, the better. The program's backers are proposing various tweaks.

Orszag and Peter Diamond, of the Massachusetts Institute of Technology, offer some ideas in their new book, "Saving Social Security: A Balanced Approach." They wouldn't depend on the luck of the stock market, as private investment accounts would. Nor would they drive up the deficit (yay!). They would simply slow the growth of future benefits and raise the payroll tax a bit, mainly on upper earners. The authors would also freeze the estate tax in 2009, when the exemption reaches $3.5 million per person. Larger estates (about 10,000 of them a year) could be taxed with the proceeds added to Social Security's trust fund.

Robert Ball, a former Social Security commissioner, would plant a small tax in the legislation that clicks in automatically when the trust fund begins to shrink. "That should avoid periodic false crises about Social Security's finances," he says.

The plans from conservatives all include private accounts. Most of the blueprints I've seen are laughably misleading. But one put forth by Reps. Jim Kolbe (a Republican) and Charles Stenholm (a Democrat) offers a possible framework to build on. They'd divert 2 or 3 percent of your Social Security contribution into a private account invested in indexed stock or bond funds. Once your account reaches $7,500, you could switch to funds run by money managers. Over time, your Social Security benefits would drop. You hope your investment will grow by enough to replace (or outpace) the benefits you lost.

It's not cheap to switch to private accounts. All the people owed Social Security checks will have to be paid while you're using some of the tax money to invest for yourself. Kolbe and Stenholm would cover the cost with higher taxes on upper earners, cuts in benefits and cost-of-living raises and, yes, more government borrowing.

A Republican sweep in November might put Social Security back on the table. But the parties are too far apart to make any significant changes. The Republicans want private accounts and, Kolbe says, "we'll be at loggerheads as long as the Democrats reject them." Luckily, Social Security is strong enough to soldier on.