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Social Security serves as an important source of income for the elderly in the U.S., and the reasons to support this universal, compulsory public policy are numerous. On average, it makes up 40% of older persons’ incomes. Income provided by Social Security has helped reduce the poverty rate among the old from 35% in 1959 to 10% today.
Social Security derives all its funding from the FICA tax. Its streamlined administrative costs add up to less than 1%. It redistributes resources from higher to lower lifetime earners. And it gives women and men equivalent benefits, though, on average, women live five years longer.
Why then are so many talking about privatizing it? Some think privatization will address Social Security’s financial problems.
The current program is fiscally sound until 2041, at which time it will cover 80% of promised benefits. But with privatization, the Social Security budget shortfall would arrive as early as 2017. Administrative costs would rise substantially as the number of accounts and the degree of government regulation increase. And because we would have to fund the old and the new programs simultaneously, overall costs would rise by nearly $2 trillion.
There are better ways to address Social Security’s fiscal shortfall. Despite the talk of crisis, Social Security is a strong program in need of only minor funding adjustments. We could increase the FICA tax from 6.2% to 7.2%. We could raise the tax cap on earnings from $90,000 to $140,000, per person per year. And we could pull the 30% of government workers who do not participate in Social Security into the program.
Others favor privatization because it maximizes individual choice and ownership. But privatization also makes old-age incomes less secure, eliminates redistribution from higher to lower earners, and ends the subsidization of women’s longer lives. We need a robust public program to ensure income security in old age.
The sooner that we fix Social Security the better. We are fooling ourselves if we delay. Note please that I say "fix" and not "end." Despite others’ rhetoric, no responsible policy person wants to end Social Security.
The problem is simple: As baby boomers age, there will be more retirees collecting benefits and fewer workers paying taxes. We have promised younger workers higher benefits than we can afford to pay. Starting in 2017, less than 10 years from now, the program will begin to pay more in benefits than it receives each year from payroll taxes. Annual deficits will quickly reach several hundred billion dollars and never end.
Who says so? Social Security’s nonpartisan, professional actuaries, the nonpartisan Congressional Research Service, Bill Clinton’s White House budget agency, and many others. Since 1983, Americans have paid more in payroll taxes than Social Security needed each year for benefit payments. Unfortunately, Congress spent the extra money on everything from roads to aircraft carriers. All that is left are government bonds that, like all IOUs, have to be repaid. Taxes that now pay for other programs will be sent to Social Security as those bonds are redeemed. Other programs will either get cut or taxes will increase.
How do you fix it? There are three ways: Raise taxes, change benefits for future retirees, or increase individual private retirement savings. All three have very real and painful side effects. For instance, raising taxes will reduce both economic growth and employment. Since this is a spending problem, changing benefits and increasing saving would be better ways to go.
I want my daughters to have the same retirement security that Social Security helped their grandparents to achieve. Delay just makes fixing Social Security harder and more expensive. It is not a responsible legacy to leave our children and grandchildren.Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.
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