Deals: Why Social Security Needs Major Repairs
In Washington these days, the only topics of discussion seem to be how many trillions of dollars to throw at health care and the recession, and whom on Wall Street to pillory next. But watch out. Lurking just below the surface is a bailout candidate that may soon emerge like the great white shark in "Jaws" -- Social Security.
Perhaps as early as this year, Social Security, which at $680 billion is the nation's biggest social program, will be transformed from an operation that's helped finance the rest of the government for 25 years into a cash drain that will need money from the Treasury. In other words, a bailout.
I've been writing about Social Security's problems for more than a decade, arguing that having the government borrow several trillion dollars to bail out the program so it can pay its promised benefits would impose an intolerable burden on our public finances. But I've changed my mind about what "intolerable" means. With the government spending untold trillions to bail out incompetent banks and the auto industry, it should damn well bail out Social Security recipients, too. But in a smart way.
Why am I talking about Social Security now, when health care is sucking up nearly all the oxygen in our nation's capital? Because Social Security is a big deal, providing a majority of the income for more than half of Americans 65 and up and also supporting millions of people with disabilities and survivors of deceased workers. And because the collapse of stock prices and home values makes Social Security retirement benefits far more important than they were during the highs of a few years ago. And because the problems aren't that hard to solve if we look at Social Security realistically instead of treating it as a sacred, untouchable program (liberals) or a demonic plot to make people dependent on government (conservatives).
Finally, this is a good time to discuss Social Security because the Obama folks say it's next on the agenda, after health care. No one at the White House, the Treasury Department or the Social Security Administration would discuss specifics, however.
It ought to tell you something that Peter Orszag, director of the White House Office of Management and Budget, is a noted Social Security scholar. Alas, he wouldn't tell me what he plans to propose. "Health care first" was all he'd say.
I'd like to show you that Social Security has a real and growing cash problem even as its trust fund is getting bigger than ever, explain how the program really works, and -- immodest though it may seem -- propose a few solutions.
The Cash Problem
How can Social Security possibly need a bailout when, by Washington rules, it's "solvent" for another 26 years? To understand the problem, look at me. I'll turn 66 next year, which makes me and my wife eligible for full Social Security benefits. They'll be about $42,000 a year for the both of us starting Jan. 1, 2011, and are scheduled to rise as the consumer price index does.
Social Security, which analyzed my situation, values those promised (but not legally binding) benefits at a bit more than $600,000. That is a lot of money, but Social Security is way ahead of us because the value of our benefits is far less than the Social Security taxes we and our employers will have paid by the end of next year, plus the interest Social Security will have earned on that money in the decades since we started working. Those taxes and interest will total more than $800,000 by Dec. 31, 2010. For example, the $5.18 my employer and I paid in 1961 -- the year I got my card -- will have grown to $140 by next year.
I don't have a problem with this disparity. One of the principles of Social Security is that higher-paid folks like me support the lower-paid. That's as it should be, given that the Social Security tax (12.4 percent of covered wages, split equally between employer and employee) is regressive, far more costly as a percentage of income to a $40,000-a-year worker than it is to me. According to the Tax Policy Institute, five of six U.S. workers pay more in Social Security tax (including the employer's portion) than in federal income tax -- something that makes it especially important (and only fair) to preserve the program for lower earners, who get old-age benefits of up to 90 percent of their covered wages, while I get only 28 percent.
How can my wife and I pose a problem to Social Security when our benefits are valued at $600,293, while our tax payments plus interest will total $804,686? Answer: Because the obligation is real, but the $800,000-plus asset is illusory, consisting solely of government IOUs to itself.
Now, let's step back a bit -- to 1935, actually -- to see how we got into this mess. President Franklin D. Roosevelt set up Social Security as an intergenerational social-insurance plan, under which today's workers support their parents (and those with disabilities and workers' survivors) in the hope that their children will in turn support them. It's not a pension fund. It's not an insurance company.