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Banking on Fantasies

September 17, 2000

We offer two pieces of advice to Americans concerned about Social Security's future. First, don't take too seriously the major presidential candidates' plans to "save" the system. Both of their proposals rest on the dubious supposition that the federal government will pile up a whopping surplus over the next 10 years, collecting nearly $4.6 trillion more than it spends. Second, don't worry about Social Security's ability to meet its obligations. No president and no Congress will allow the nation's most popular social program to fail.

Right now the system is in good shape. But starting in about 15 years things look less rosy. That's when the first of the 76 million baby boomers born between 1946 and 1964 leave the labor force, in which their payroll taxes help to finance benefits for those already retired. Within a few decades the current 3.4-to-1 ratio of workers to retirees will decline to 2 to 1. That's when Social Security will have to start dipping into its trillions in surpluses. Social Security's trustees project that those surpluses will be gone by 2037. Unless fixes are made earlier, the system at that point will be able to pay only 72% of its promised benefits.

Neither Gov. George W. Bush, the GOP presidential nominee, nor Vice President Al Gore, the Democratic standard-bearer, has said much about this looming structural problem of too few workers paying for too many retirees. Instead, each has proposed gimmicks to supplement Social Security income or even, in Gore's case, to expand the system.

Bush would let younger workers divert to individual stock market accounts part of the 12.4% in payroll taxes they and their employers pay. Those who did so would be paying less into Social Security, so they would get a lower guaranteed benefit on retirement. Their income in retirement would depend in part on how well their investments performed. Meanwhile, diversion of payroll taxes to individual market accounts would give Social Security less money to pay current retirees, a shortfall estimated at $3 trillion. That's most of the assumed $4.6-trillion surplus. But if the surplus fails to meet projections, Bush's promise to maintain current benefits could be kept only by raising taxes.

Gore has his own individual investment plan. He would maintain current Social Security commitments but also offer a matching program for those who put money into special retirement accounts. A couple earning less than $30,000 a year who contributed $500 to such an account would get $1,500 in matching federal money. The government's contribution would decline as incomes went up, with $500 going to couples earning $100,000 who put $1,500 in the special account. This would be a massive new entitlement program. At the same time, Gore wants to increase payments to some beneficiaries, including women whose work years were interrupted while they raised children. How would he cover the $300 billion these plans would cost? How else but by tapping into the projected surplus.

Social Security currently provides more than 60% of retirees with at least half of their total income. For one out of seven retirees, Social Security is his or her total income. Lowering benefits to keep the system solvent is a morally unacceptable and politically impractical option. No less acceptable would be further raising the age at which full Social Security benefits can be collected. That age is already scheduled to rise in increments to 67 for people born after 1959. Realistically, that's probably the limit that can be required.

In the end, raising payroll taxes could be the surest and most broadly acceptable way to keep the system healthy. For starters, the ceiling on earned income subject to the tax--$76,200 this year--could be increased or eliminated. Calculations by the American Academy of Actuaries indicate that some combination of adjustments in the payroll tax could pretty much take care of the solvency problem for decades to come.

No politician will rush to embrace even moderate payroll tax increases, and certainly few workers would welcome them. But Social Security is sliding inexorably toward a deficit, and no one is eager to accept the consequences of that either. Unpalatable though the idea of payroll tax increases might be, it still appears to be the best way to assure the system's solvency.

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