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Why Are We So Insecure About Social Security?


Economic Viewpoint

WHY ARE WE SO INSECURE ABOUT SOCIAL SECURITY?

The new 32-member bipartisan Commission on Entitlement & Tax Reform is on a crusade to demonize entitlements, particularly Social Security. The commission was authorized in the 1993 budget accord as part of a bargain to win the vote of Senator Bob Kerrey (D-Neb.), who was named commission co-chair. At its first public meeting on June 13, Kerrey declared: "Entitlements are a barrier to savings and economic growth....They will bankrupt America if we do not bring our commitments in line with our capacity."

According to anti-entitlement groups, Social Security is on the verge of insolvency; it incurs debt, depresses growth, and subsidizes the affluent old at the expense of the working young. Thus, Social Security should be slashed for the sake of fiscal balance, economic growth, and generational fairness. The Concord Coalition, an anti-entitlement lobby, proposes to means-test Social Security by limiting it to people of moderate income.

Is Social Security really a fiscal monster? A reading of the statistics in the 1994 Social Security Administration annual report suggests the need for reform but not alarm. For starters, Social Security is not a source of the deficit. On the contrary, Social Security will run a $43 billion surplus in 1994, and its surplus will increase for another decade. The system's annual income will continue to exceed its annual payouts until the year 2019, when baby boomers flood the ranks of retirees. Even so, Social Security will have more than enough revenue and reserves to cover its projected obligations fully until 2029--35 years into the future.

However, if we extrapolate lengthening life spans into the mid-21st century and fail to make adjustments, Social Security would then begin experiencing deficits (though manageable ones). According to the annual report's 75-year projection, if we make no changes for a generation, payroll taxes will have to rise by about four percentage points beginning in 2019 to keep Social Security checks growing with the cost of living throughout the next century. Alternatively, if we raised payroll taxes by about two percentage points now, Social Security would be solvent indefinitely.

NEW AGE. Of course, there are better ways to guarantee Social Security for our grandchildren than raising payroll taxes, which already are too high. One way is to keep adjusting the retirement age to reflect longer life spans. When Social Security paid its first check in 1940, the average new retiree could expect to live another 12 years. Today, that span is almost 18 years. A House Ways & Means Committee plan would restore long-term balance to Social Security by trimming benefits an average of 8.7% beginning in 2003, raising the

retirement age to 67 in 2016, and having a one-time cut in the annual cost-of-living adjustment. Economist Henry J. Aaron of the Brookings Institution adds the suggestion that Social Security income should be taxed the same way other pension income is taxed.

The relative modesty of these adjustments should put alarmism to rest. As Robert S. McIntyre, director of Citizens for Tax Justice, observes, Social Security currently pays out about 4.6% of gross domestic product, down from 5.1% in 1983. Even if we do nothing at all, 30 years from now it will pay out all of 6% of GDP--hardly cause for hysteria. Neither can we fairly blame Social Security for depressed U.S. savings rates. Every member nation of the European Union has higher rates of savings than we do--and every one has more generous citizen-pension systems.

IDEOLOGICAL ASSAULT. Nor are most old folks living it up on Social Security checks. A majority of the elderly depend on Social Security for more than half their income. Only 22% of retired people even reach the $25,000 total income threshold ($32,000 for couples) where they begin paying taxes on half of their Social Security income. Means-testing Social Security would be the surest way to wreck it, for it would turn Social Security into another welfare program instead of an earned pension plan for everyone.

It's true that the U.S. system of social insurance favors the aged. Elderly people get Social Security checks and Medicare coverage. But contrary to the views of the Entitlement Commission and the Concord Coalition, the solution to that inequity is not to modify Social Security. It is, rather, to extend universal health coverage to all age groups.

Indeed, the biggest budget buster today is not Social Security but health care. Medical outlays consume nearly 15% of GDP now, or more than three times Social Security, and will claim an additional percentage point of GDP nearly every two years--absent reform. Universal health coverage could stop medical cost inflation by compelling the health system to live within an overall budget.

Social Security does need some adjustment; we owe that to future generations. But the broader attack on social insurance is really an ideological assault, masquerading as fiscal prudence and generational compassion. Paradoxically enough for the entitlement bashers, the cure for both the generational imbalance and the fiscal worry is another entitlement--universal health insurance.ROBERT KUTTNER


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