Review & Outlook
Mr. Security got fat.
July 12, 2000, Page A26
You should have seen me in 1940.† I was the most perfectly tailored suit you could imagine:† the wide shoulders of my jacket made a fetching drape across my back, my trousers fell in soft pleats and broke in the middle of my shoes.† My name is Social Security and I could not have asked for a better fit.
I was crafted especially for the times.† The country was slowly coming out of the Great Depression.† People everywhere were poor, but old people were especially hard hit and had little chance of recouping what they had lost over the past decade.† There was widespread pessimism about the future and, of course, anxiety about saving for the future.† But people were out of luck.† Not only was there no such thing as computers, the Internet and day traders, but nobody had even heard of money-market accounts, jumbo CDs, mutual funds, index funds, competitively priced stock commissions, 401(k)s or IRAs;† indeed, few companies had pension plans.
Something had to be done and I was that something.† Philosophically, of course, I was right in line with reigning belief that government was the proper agent to provide the answers and wherewithal to any problem.† The idea was to nick a little off of everybodyís paycheck with a payroll tax and then give that money to the impoverished elderly.† Even better, to disguise this welfare program and cheer everybody up, the tax money was to be redistributed to anybody over the retirement age, and the in-out mechanism was to be called a Trust Fund.
It worked like gangbusters.† Mostly because there were plenty of workers to support this scheme -- 41 workers for every one retiree -- and the payroll tax was set at about 2% up to the first $3,000 of earnings, allowing an average benefit of $272.50 a year.† And, boy, was I a good deal.† The real rate of return for the average single male retiring in 1940, according to Gareth Davis at the Heritage Foundation, was 114% a year.
Some people got really good deals.† Take my friend Ida May Fuller, an unmarried legal secretary living in Vermont, who got my first check in 1940.† Ida May paid a total of $24.75 in Social Security taxes and, when she died in 1975, had received lifetime benefits of $22,889.† By 1970, poverty among the elderly was reduced to under 25% from around 50% during the Depression (and is currently at 9%).
But, oh, I forgot to tell you about my hat -- a handsome snap-brim fedora that was supposed to keep the lid (as it were) on benefits.† Well, somewhere around the 1950 [sic], my hat blew away, and Congress started increasing benefits.† For example, the definition of who was qualified to receive Social Security was expanded and the money value of the benefits was increased.† The result was that the average benefit in 1998 had climbed to $9,050.† (Today, 45 million people are covered by Social Security and annual expenditures top -- hold onto your hat -- $400 billion.)
At the same time that benefits and beneficiaries were expanding, life expectancy was rising -- to 77 years today from 63 years in 1940.† And, more importantly, fertility rates were declining:† in 1940, there were 2.2 children per female, but by 1998 there were fewer than two children (except for the 1950s when families had an average of more than three children -- an outburst that created the boomer generation;† more on that later).
Accordingly, the number of workers supporting each Social Security dependent has dropped like a stone.† It was 41 in 1940;† then fell to 16 in 1950, and to 3.4 workers in 1998.† Economists estimate the number is going to fall to 2.1 by 2030.† Fewer workers supporting more dependents meant that workers have had to ante up more and more of their wages.† Way back when, the payroll tax was 2% on income of $3,000;† itís now 12.4% on income of $68,400.† And the real rate of return for a single male born in 1960 and retiring in 2025 has collapsed to 0.97%.
At the moment, I am running a surplus because the boomers are working like mad, and I am consuming a huge chunk of their earnings.† As they start to retire, however, we are in for a big problema.† Around 2015, I will have a cash shortfall;† 10 years later I will have to borrow from general revenues, and by 2033 thereís only enough money coming in to pay three-quarters of my obligations.
In a word, I have become a huge tax-funded Ponzi scheme that is starting to go seedy -- and I am starting to look it, too.† All the beneficiaries are bulging my belly over my waistband, the declining number of workers supporting the dependents are making my jacket bag around the shoulders and the increasingly skimpy rates of return are creating a gap between my cuffs and my shoes.† [emphasis added]
Well, we can recognize that a lot has changed since 1935.† For starters, the notion that people need to be protected and indemnified against risk by the government has been replaced by a more energetic sense of personal responsibility.
This is pretty clear from a review of various polls on attitudes toward the government compiled by Karlyn Bowman at the American Enterprise Institute.† Over the past 30 years, American opinion has changed dramatically from trust in government competence to, well, distrust.† Likewise, a majority of Americans, especially younger ones, are expressing increased self-confidence about providing for their own future retirement.† Self-reliance is in, government dependency is out.
And this self-reliance is not misplaced.† Sure, itís true that more than half of American households now own stock and thatís cool all by itself.† But a more important point is that the past 25 years of deregulation of the financial sector and the resulting unleashing of competition have generated an array of investment and savings vehicles.† Now people do have 401(k) and IRA plans, mutual and index funds, money-market accounts and access to the options and futures markets.† This is as much a part of the New Economy as dot-com zillionaires.
And thatís why market-based reform, or privatizing Social Security, is so appealing.† It is tailored to the realities of today, not those of 65 years ago.† Most people are already investors -- whether they are allocating funds in their company-sponsored pension plans, opening brokerage accounts to save for their kidsí education or racing home after work to day-trade their mad money.
Granted, investing involves risk, but it also generates returns and, in this case, returns are doubly attractive.† First, rates of return from even a conservatively diversified portfolio will out-pace returns to be had from Social Security over the long term.† Second, the assets from which those returns flow are owned by the investor, not subject to political exigencies of government ďownership.Ē† (Yikes!† Talk about risk.)
No question, privatizing Social Security will be a new set of clothes.† (Iíd like to think of myself in an all-spandex roller-blade outfit.)† It is a recognition that the retirement plan of the Old Economy is not only too ponderous to respond to a changed world, but has yielded up, today, a system that is oppressing young workers.† Why not replace it with one that can empower current workers, enrich future retirees, propel economic growth and cement the change in the political climate?† Itís not only the stylish thing to do, itís the fair thing.
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