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March 5, 2004

Another Warning on Social Security

You can’t complain about the lack of political debate these days.  We’ve had debates on television, debates in the newspapers, and inNew Hampshire at least, debates in every grocery store and coffee shop you can find. The campaign season has been in full swing for months, and the media have ramped up the efforts to bring it all into our homes.

Those debates have pressured us all to take sides on issues and candidates, which are instantly quantified in the results of endless polls.  That’s great for the candidates and the professionals who manage them, but is it good for the rest of us?  Aside from settling the various horse races for those who seek political power, do these debates move us forward in addressing and effectively managing the challenges we confront?

In the case of Social Security, the answer is a resounding no.  That was underscored last week when an unelected official with no stake in the election, Fed chief Alan Greenspan, bluntly warned Congress that it needs to reduce benefits or increase the retirement age today to head off disaster in the coming years.  From the reactions of candidates on the stump, you would have thought that he was speaking a foreign language.

Mr. Greenspan merely amplified what economists and actuaries have been saying for years.  The oldest baby boomers will begin reaching retirement age in 2008, and the cumulated promises the Federal government has made to pay them will come due.  It will be the job of those of us who are working to make good on those promises, and the projections say that without significantly higher tax rates, there won’t be enough.

Our elected officials have failed to manage this problem.  In fact, they have made it worse by adding prescription drug coverage to Medicare, another underfunded promise the working generation will have to make good on.  But that’s a column for another day.

Instead, what passes for a debate on Social Security centers on the issue of privatization. At least that is what people think they are debating.  At times it sounds a lot more like a debate on the entire private economic system.

Privatization, or the diversion of our tax payments away from the Social Security system into private investment vehicles, is either evil incarnate, or our last hope, depending on your political persuasion.  But here’s why the idea is not going to go away.

A working couple that is 30 years old today and earns $52,000 a year can only expect a rate of return of between 1 and 2 percent in Social Security.  If they were to set aside 12.4 percent of their income, equivalent to the sum of their own and their employer’s tax contributions, into an account with that return, they’d have about $300,000 of accumulated savings to spend down when they reached age 65.

But there are risk-free investments in the private sector that perform much better than that.  If those payments were put into U.S. Treasury Bonds, earning about 5.5 percent, the nest egg would be just under $700,000. And if they invested in the market and got a 7 percent return, it would be almost $1 million.

But there’s a catch.  Uncle Sam needs every cent and every dollar of revenue from the payroll tax just to make payments to those receiving benefits.  Even a small diversion brings the day of insolvency closer.

That’s why we should be paying attention to Mr. Greenspan.  Call it tough love, or call it protecting Social Security, but something must be done now to throttle back benefit growth to get this problem down to a more manageable size.

Link to this commentary: https://commentaries.cberdata.org/331/another-warning-on-social-security

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About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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