- The Washington Times - Monday, March 17, 2003

The new Annual Report of the Social Security Board of Trustees will be out this morning. For many years now, these official government reports have made a powerful case for fundamental Social Security reform, and today's report will add further to that case.
The report will once again show a dramatic long-term financing crisis in the program, perhaps worsening due to the economy. Moreover, these reports do not adequately take into account the prospects for much longer life expectancies during the next century due to advanced, high-tech medicine. Substantially increasing the number of retirement years will greatly increase the program's benefit obligations and long term deficit.
Even apart from that, the report will already show that under intermediate assumptions paying all promised benefits today's young workers would require raising payroll tax rates by around 50 percent, from a total of 12.4 percent today to around 19 percent. Under so-called pessimistic assumptions, which allow more scope for increasing life expectancies, payroll taxes would have to rise by around 100 percent, growing to a total levy on wages of about 25 percent. Even under the intermediate assumptions, however, the cash deficit in the program over the next 75 years will probably be more than $20 trillion.
But this is not even the biggest problem facing the program. The biggest problem is that even if all the program's benefits are somehow paid, it will still be a poor deal for today's workers. Taxes are already so high that even the promised benefits represent a very low real return for most of today's families of around 1 percent to 2 percent or less. For many, Social Security promises the family a zero or even negative return. This is like paying the bank to hold your money instead of getting interest.
With real long-term returns of 7 percent to 8 percent on corporate stocks and 3 percent or more on corporate bonds, no wonder today's workers would likely see far higher returns and benefits by saving and investing their payroll taxes in a fully invested personal account. Average-income families can accumulate $500,000 to $1 million in today's dollars through such accounts over their working years, paying no more into them than what they and their employers already pay for Social Security retirement benefits. Such accounts would pay these workers 2-3 times what Social Security promises but cannot pay. This can all be further documented by examining the Social Security calculator at the Cato Institute website.
The same problems afflict low-income workers and disadvantaged minorities. A pathbreaking study from the Heritage Foundation showed that because African-Americans have lower life expectancies on average they receive an even worse deal from Social Security. The study calculated that a single black male born in 1970 could expect a real return from Social Security of negative 1.5 percent, even if all promised Social Security benefits were somehow paid. The return for an average income two-earner African-American family with children was effectively 0 percent (0.15 percent).
The public now fully recognizes these intractable problems. The latest Zogby poll showed the public supporting a personal account option for Social Security by an astounding 68 percent to 29 percent. Polls have now consistently shown such support going back almost 10 years.
This public opinion was born out in last year's elections. Supporters of modern personal accounts were fiercely attacked by the reactionary left. But as Zogby summarizes the results, "In every race where Social Security was a major issue, the pro-account candidate won."
What is not well recognized is that this support is now breaking out among liberal grass-roots groups and leaders as well. In the Zogby poll, Hispanics supported a personal account option by 72 percent to 28 percent, union households by 64 percent to 34 percent, and African-Americans by 58 percent to 39 percent. Even Democrats as a whole supported it by 56 percent to 40 percent.
Moreover, on Dec. 3, no less than Bill Clinton told the Democratic Leadership Council the following in regard to Social Security reform: "One thing you could do is to give people 1 or 2 percent of the payroll tax, with the same options that federal employees have with their retirement accounts; where you have three mutual funds that almost always perform as well or better than the market and a fourth option to buy government bonds, so you get the guaranteed Social Security return and a 100 percent safety just like you have with Social Security."
Then, a week later on Dec. 9, even The Washington Post editorialized as follows: "So it makes sense to consider the merits of a pension system in which at least a part of the money that ordinary workers pay into Social Security is invested in the private sector. The return on capital investment is higher, historically, than the growth in wage levels that support the payroll tax. … It should not be taboo to discuss a system that might provide the poor, in particular, with higher benefits in old age, and that would encourage saving in a country that is notoriously bad at it."
What is needed now is a truly progressive reform proposal that delivers on the promise of personal accounts to the benefit of working people and disadvantaged minorities across the board. Stay tuned.

Peter Ferrara is director of the International Center for Law and Economics in Fairfax, Va.

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