"SOCIAL SECURITY isn't going to be there when I retire," is a common mantra among Baby Boomers and Generation Xers alike.
The notion that Social Security is broken and in need of fixing is a popular misconception. Fortunately, the facts don't support the myth of the Social Security crisis.
Social Security is a remarkable success story, and it is sound. It has kept tens of millions of retired Americans out of poverty. Those who earned the least get the best return, but virtually everyone gets some benefit from the system.
The system also provides life and disability insurance for almost the entire work force. It does this with a minimum of waste and fraud.
Its operating costs are less than 8/10 of 1 percent of annual benefits. By comparison, the operating costs of private insurers are more than 30 percent of benefits paid out.
If nothing is done to "fix" Social Security, in the year 2030, the average worker will have $29,390 a year (in 1996 dollars) left after paying taxes needed to meet Social Security's unfunded liabilities.
By comparison, an average worker today has about $21,480 left over after paying his Social Security taxes.
These are not funny numbers, cooked to lull us into a false sense of security about the nation's most important social program. They are based on the Social Security trustees' intermediate projections.
These projections are the standard basis for making policy. They assume that the next 20 years will have slower growth than any comparable period in U.S. history, even the period that includes the Great Depression. After 20 years, they assume that growth will slow further, until it's less than half the recent rate.
In fact, the findings of the Boskin Commission indicate these projections are understated. This commission was appointed by the Senate Finance Committee and chaired by Michael Boskin, the head of President Bush's Council of Economic Advisors. The commission concluded in an interim report that the Consumer Price Index has been overstating inflation by 1.5 percent a year.
If they are right, then real wages have actually been rising 1.5 percent a year more rapidly than we thought.
If the Social Security projections are adjusted in accordance with the Boskin Commission's findings, then the average real wage in 2030 will be nearly $50,000, even after deducting the additional Social Security taxes needed to support the system.
What's the problem?
If future generations can expect this sort of income growth even after paying higher Social Security taxes, then what's the problem with Social Security?
First, there will have to be small incremental tax increases at some point if the current level of benefits is to be maintained. Contrary to popular belief, this is not primarily due to the retirement of the Baby Boom generation, but rather to increased life expectancies.
According to the projections, if there is no accumulated surplus to draw on, the Social Security tax will have to be more than 5 percentage points higher in 2060 than at present, if the current benefit schedule is left in place. This is due to the fact that future generations will have longer life expectancies and longer retirements, since virtually all the Baby Boomers will be out of the picture by 2060.
In other words, if future generations decide that they want to enjoy a longer retirement, they will either have to tax themselves more during their working lives, or get a smaller percentage of their salary as a retirement benefit.
A second issue is the projected explosion of Medicare costs. This is a real problem, but it stems from problems in the nation's health care system generally, and has nothing to do with Social Security.
Given these facts, why do we hear so much about the Social Security crisis? The first answer is simple, money. The financial industry siphons off roughly 30 cents of every dollar it handles.
If this powerful industry could manage to replace Social Security with a system of government mandated savings, it could easily earn in excess of $100 billion a year in additional fees and commissions. These stakes provide considerable incentive to attack Social Security.
The second reason is lack of faith in government in general, and the conventional wisdom that the private sector is more efficient.
In the case of Social Security, the evidence shows the overwhelming superiority of the current system over untested schemes for government mandated savings.
The numbers indicate that Social Security can continue to provide Americans with some real security in their retirement.
The system must be protected from those who would manufacture a phony crisis as an excuse to dismantle it. Social Security should be preserved for generations to come.
Dean Baker is an economist with the Economic Policy Institute in Washington.
Pub Date: 8/16/96