Imagine a couple entering the work force in 1985, earning the average U.S. income each year until retirement and investing the equivalent of the Social Security taxes in stocks at an average real return of 4 percent (low by historical standards).
The existing Social Security system depends on current workers to pay the benefits of current retirees. But soon there won't be enough workers to support the legions of Baby Boomers retiring. In theory the Social Security trust fund has a big enough surplus to compensate for a shortfall in payroll tax revenues until 2030.
The key phrase, of course, is "in theory." In fact the government has been plundering the fund, and Social Security taxes will begin failing to cover benefit payments in 2013 (or in the worst-case scenario 1999).
Critics argue that the U.S. should follow the example of Britain, Chile, Singapore and other countries that allow workers to invest at least part of their social security taxes in private investments.
The remodeling of Social Security should be accompanied, they believe, with a reduction of government spending. According to the president of the Concord Coalition, trying to balance the budget without touching Social Security is like trying to clean the garage without moving the Winnebago. You can start the job but you can never finish.
Fortunately, reformers note, privatization is hot right now:
Source: Editorial, "Social Security: Be Wise, Privatize," Dallas Morning News, May 7, 1996.
A number of individuals and groups are giving Social Security privatization their serious attention. How might it work to salvage the system and assure its viability after 2013 -- when the baby boomers start to retire and it goes into the red?
How might their investments fare?
Some think the government should control the investments in the stock market, a proposal which sends shivers up the spines of free-market advocates. They foresee the federal government controlling much of the economy.
However, if that trap is avoided, wage earners would profit from investment of their Social Security taxes -- especially the poor, who typically don't benefit from higher returns in the stock market because they have little opportunity now to build wealth. According to one analyst, their post-retirement income could be greater than their pre-retirement income.
Source: Perspective, "Saving Social Security," Investor's Business Daily, October 22, 1996.
According to some political observers, this will be the last election when politicians will be able to say, "Social Security is off the table."
A few facts may shed some light on the plight of the American Social Security system, and show why reform is inevitable.
Social Security runs an annual surplus of $65 billion and has accumulated almost one-half trillion dollars. this is projected to grow to over $1 trillion before the balance sheet turns negative in 2013. But it will turn negative with a vengeance: the surplus will be wiped out in a decade and a half, and the system will be bankrupt by 2029.
And even the current surplus is illusory: the federal government has been borrowing the extra cash since 1983. Those IOUs will have to be redeemed starting in 2013 -- and additional funds will have to be milked from the economy, one way or another.
One way out of deep cuts in benefits or extremely high taxes is privatization:
A recent Cato Institute poll found that 69 percent of Americans now favor privatization of Social Security -- including a strong plurality of 47 percent of seniors.
By whatever means, reforms must take place by the end of this century, according to experts, or it will be too late.
Source: Gordon S. Jones (Seniors Coalition), "Social Security Will Not Be Ignored Anymore," Washington Times, October 23, 1996.
