Social Security anxieties

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In the last presidential election, Social Security loomed large as an issue. This time around, no one is talking about it -- and that's too bad. The future of elderly entitlements is the most serious domestic policy issue this nation faces.

Democratic challengers to President Bush have a special obligation to be forthright about Social Security. Why? Because many of the natural constituencies of the Democratic party -- especially minority voters -- have the most to gain from intelligent reform of the system.

When Social Security began in 1938, the retirement age was set at 65. But the life expectancy of the average American at birth was only 63. Of course, an average is only an average. The designers of the system knew some people would do worse and others better. The ones who beat the average and lived to age 65 and beyond were the ones who collected benefits. But most people in 1938 could expect to work and pay Social Security taxes their whole working lives and die before collecting anything.

For African-Americans, the promise of Social Security was even worse. In 1938, the average life expectancy of an African-American was only 53 years. Blacks could expect to pay Social Security taxes throughout their working lives and die 12 years before collecting a dime!

With the passage of time, life expectancy for all Americans has increased, for blacks as well as whites. But just about the time when the average African-American male reached the point where he could expect to live long enough to receive benefits from the system, Congress raised the bar. Over the next few years, the retirement age will increase to 67. As a result, a black male at birth today can expect to pay Social Security taxes his entire life and collect only a few months of benefits.

Think of Social Security as an investment, and compare expected costs with expected benefits. A National Center for Policy Analysis (NCPA) study did just that and concluded that a 20-year-old black male entering the work force today can expect to a return of less than 1 percent on all the taxes he and his employer will pay (in making this calculation, the NCPA considered survivors, in addition to retirement benefits).The rate for white males is not much better, but it is twice the return promised to black males.

Black males are underrepresented among Social Security beneficiaries and overrepresented among Social Security taxpayers. For women, the picture is not quite as bad, because they live longer than men. But many women get hit with another unpleasant surprise. A homemaker who never works is entitled to a benefit equal to half of her husband's benefit, and one equal to 100 percent of her husband's benefit after he dies. But women who work cannot collect benefits based on their husband's contributions plus the benefits they earn in their own right. It's one or the other. As a result, many women work and pay taxes over the course of a career -- only to discover at retirement they will collect little or nothing extra in return for all the payroll taxes they paid.

In the future, things will get worse. In less than a decade, 77 million Baby Boomers will stop paying taxes and start receiving Social Security benefits. Not long after that, Social Security will begin running a deficit, and that deficit will grow larger each year. In fact, the unfunded liability in Social Security and Medicare is 10 times our national debt when measured in current dollars. Unless the system is reformed, either benefits will have to be cut or taxes increased. Either alternative will lower the return even more for workers paying into the system.

The right question for presidential candidates is: What are you going to do about it?

There are about 20 countries in the world today that have fundamentally reformed their Social Security retirement systems, including such diverse places as Britain, Hong Kong and Chile. These countries have rejected the pay-as-you-go approach, under which each generation of retirees depends on the next generation of taxpayers to pay its benefits. Instead, they have opted for a funded approach under which each generation saves and invests and pays its own way.

Funded approaches work best when there are individual accounts that are the property of the worker. That's because it's harder for politicians to seize the funds and spend them on something else. Personal retirement accounts would have another advantage for minority workers. In case of an early death, the account could be bequeathed to the worker's heirs.

The time to act is now, well before the Baby Boomers start retiring. The longer we delay reform, the worse the problem will get, and the more difficult it will be to do anything about it.

Harry Alford is president and chief executive officer of the National Black Chamber of Commerce. John C. Goodman is president of the National Center for Policy Analysis in Dallas.