- The Washington Times - Sunday, December 19, 2004

Social Security is broken, and President Bush will likely spend the better part of next year trying to fix it. An integral part of any solution he proposes will be voluntary personal investment accounts, which will enable younger workers to avoid the Social Security train wreck that awaits them. The program cannot survive under its present structure.

Designed at the outset as a pay-as-you-go system, Social Security in its early stages was aided by extremely favorable demographics. Compared to today, life expectancy in 1930 was much lower, as was the percentage of adults who eventually reached the retirement age of 65. For decades Social Security provided benefits that far exceeded the recipients’ contributions at a relatively low cost that was affordable to the taxpayers.

In 1945, 10 years after it was established, there were more than 40 workers contributing into a fund for each retiree receiving benefits. Initially, a 1 percent payroll tax paid by both employees and employers on the first $3,000 of annual wages financed the benefits. Gradually, the ratio of workers to beneficiaries declined, while the tax rate and tax base increased. By 1960, the workers-to-retiree ratio fell below 10, while the combined payroll tax increased to 6 percent.

Today, the workers-to-retiree ratio is less than 3.5, on its way to a projected 2.1 by 2030. Meanwhile, the combined payroll tax has steadily increased to 12.4 percent, while the wage base to which it applies now approaches $90,000. Social Security clearly has become far more expensive for those financing it. In fact, tens of millions of working-class and middle-class households today pay far more in Social Security taxes than they pay in income taxes.

If Social Security were solvent over the long term, which the program’s trustees have traditionally defined as a 75-year period, one could at least make an argument against a major overhaul. But Social Security is effectively bankrupt over the long term. Social Security has more than $10 trillion in unfunded liabilities, which reflect the difference between the program’s promised benefits and the expected revenue available to pay them. By comparison, the value of all the stocks comprising the Wilshire 5000 index is about $14 trillion.

For more than 20 years now, Social Security’s payroll taxes have exceeded the benefits paid. Those excess payroll-tax receipts have been used to finance other programs. The government effectively issued IOUs that were deposited in a “trust fund,” which accumulates interest payments and now totals about $1.5 trillion. But these IOUs are not real assets in any sense of the word.

Social Security trustees project that payroll taxes will continue to exceed benefit payments until 2018, after which the IOUs in the “trust fund” will have to be redeemed. Opponents of major reform pretend that these IOUs are bona fide assets. They are not. To obtain the funds to redeem these assets, the federal government will have to raise taxes, cut other programs or borrow the money. And by 2042, even the fictitious, paper assets in the trust fund will have been exhausted, at which time Social Security trustees acknowledge that payroll taxes will be sufficient to pay only 73 percent of promised benefits.

The status quo is not acceptable. An overhaul of the 70-year-old Social Security program deserves to be at the top of the president’s agenda. We look forward to closely examining the pros and cons of the many proposals for change that will be discussed during this momentous debate.

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