Opinion Editorial | |
| Thursday, March 5, 1998 | |
HARD QUESTIONS ON SOCIAL SECURITYPete du PontFormer Governor of Delaware, is Policy Chairman of the National Center for Policy Analysis |
Now that President Clinton has ratcheted up the Social Security debate
with his proposal to dedicate budget surpluses to shore up a weakening system,
the hard choices will soon be upon us. The first hard choice concerns the huge Social Security tax rate increases
that must soon be imposed to fund retirement benefits. At a 15.3 percent
rate, the Social Security payroll tax is already the most burdensome tax
for most workers. Since 72 percent of all Americans paid no more than 15
percent in federal income taxes, this means that for most people the payroll
tax is the single biggest tax they pay. And after the turn of the century, it is going to get much worse. According
to my colleagues John Goodman and Dorman Cordell of the National Center
for Policy Analysis, rising costs for Social Security and Medicare may raise
the payroll tax rate to 53 percent by the time today's college students
retire. A recent report from the General Accounting Office reached similar
conclusions. According to it, by 2040 Social Security and Medicare alone
will consume 100 percent of all federal revenues if present trends continue. Thus we are presented with a seemingly insoluble dilemma. Social Security
taxes are already too high, but inevitably must rise unless benefits are
cut. Since there is no political will to reduce Social Security benefits
-- and since America should honor its commitments to the retired -- it seems
that we are on a collision course with fiscal doom. Fortunately, there is a way out. The key is a bargain with current working
men and women: in return for a cut in your current payroll taxes, which
you can invest in your own IRAs or similar vehicles, you would accept a
cut in Social Security benefits when you retire. These reduced benefits
would not only be covered by your IRA earnings, but you will have the opportunity
to retire with even greater incomes. Over time, as today's retirees die, the tax rate could be further reduced,
leaving Social Security as a true safety net for retirees, rather than the
principal source of their income. Most of a future retiree's income would
then come from private saving, such as Individual Retirement Accounts and
401(k) plans. How could benefits be cut enough to finance such a privatized Social
Security system? That leads to the second hard choice: increasing the retirement
age. The retirement age has been fixed at 65 years since Social Security's
inception. At that time, life expectancy for a male at birth was just 58
years. Today it is 73 years. There is no question that the combination of longer life spans and rising
Social Security benefits has encouraged many workers to retire earlier than
they otherwise would. In 1940, the labor force participation rate for men
age 65 was 70 percent. Today it is just 33 percent. Thus we are spending
more on Social Security benefits at the same time people are contributing
less because of early retirement. So raising the normal retirement age is an important key to solving
the looming Social Security crisis. In testimony before the House Ways
and Means Committee on February 26, a number of experts agreed. Professor
Richard Burkhauser of Syracuse cited studies showing that many older Americans
would like to continue working, but are discouraged from doing so by Social
Security rules that reduce their benefits. He found that getting older
workers to delay retirement by just a few months does a great deal to reduce
Social Security's long-term deficit. Of course, the retirement age is already scheduled to rise to age 67,
but that will not be until the year 2022. A much more significant rise
will be necessary to save Social Security from complete collapse. How would today's younger workers react to the prospect of not retiring
until, say, age 70? Given increasing life spans and the shift to knowledge-based
careers, I think they would have no problem at all, especially if given
the opportunity to invest some of their own Social Security taxes in the
market and own the assets those investments produce. Many younger workers
already anticipate the need to work longer because they do not think they
will get anything at all from Social Security when their time comes. In short, I think younger workers are prepared to accept the loss of
benefits implied by an increase in the retirement age. All they ask in
return is the chance to keep more of their own income while they work.
Cutting Social Security payroll taxes for younger workers while raising
their retirement age may, therefore, be a trade-off that can work both economically
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