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Social Security
Social Security:
The Clock is Ticking

By Dan Froomkin
Washingtonpost.com Staff
Updated February 25, 1999

In 1935, after bank failures and a stock market crash had wiped out the savings of millions of Americans, the country turned to Washington to guarantee the nation's elderly a decent income.

The solution was Social Security.

More than six decades later, with the gigantic Baby Boom generation approaching retirement age, Social Security faces a funding crisis. By about 2012 more money will be going out to Social Security recipients than will be coming in from workers' payroll taxes. The system's trust fund can cover the difference for a while, but by about 2032 the trust fund will be empty and the program will no longer be able to meet all its obligations.

The Options

Historically, politicians have had a simple, consistent position on Social Security: Do nothing.

Democrats steadfastly opposed tinkering, concerned that any changes would erode the safety net provided by a program they revere as the greatest and most inviolable legacy of the New Deal.

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And while many Republicans consider Social Security the ultimate Big Government program – with plenty of social engineering thrown in for good measure – they learned over time that its popularity with the voters made it untouchable.

Facing the irreversible demographic trends, however, even staunch defenders of Social Security now acknowledge that it is time to talk about change. A spirited bipartisan debate is raging, in Capitol Hill and across the nation, over a handful of possible changes all of which were considered unthinkable a few years ago:

    Cutting benefits across the board (or just for the wealthy);

    Raising the payroll tax across the board (or just for the wealthy);

    Raising the age at which retirees become eligible;

    Investing the trust fund more aggressively;

    Letting workers contribute to personal security accounts that the government would manage (or that workers would manage themselves).

Privatization

Proposals that call for investment in the private sector get most of the attention. One school of thought calls for the system to invest some of its money in the financial markets, instead of in relatively listless government bonds. Supporters say that would create a windfall; opponents say itís too risky.

The most dramatic proposals would have workers place the bulk of their payroll taxes in individual retirement accounts that they could invest as they choose. Champions of this idea – mostly but not exclusively conservatives and libertarians – say it would boost returns and restore workers' faith in the system.

A more moderate approach calls for the individual accounts to supplement a system that would be similar to the current one.

More Than Just a Savings Plan

Radical privatization would end Social Security as we know it. Social Security is not simply an investment vehicle or a pension program – and never has been.

Today, Social Security provides benefits to about 43 million Americans, not only to retired workers but also to the spouses and dependents of workers who die prematurely and to disabled workers and their dependents.

Social Security looks to many people like a simple (if massive) retirement savings account. After all, you generally contribute through payroll deductions, then get money back after you retire. But Social Security in fact is a complex social program.

By design, Social Security involves massive subsidies from the next generation of retirees to this one, from single workers to married couples, from two-earner couples to one-earner couples, from high-income earners to low, from the able-bodied to the disabled, and from those who die early to those who die late.

A mandated savings and investment plan can't do what Social Security does today. Rather than redistributing benefits in intentional and socially conscious ways, a personal-investment plan could raise or lower people's benefits based on such factors as investment ability, luck and timing. What happens to the Social Security guarantee if some investors do vastly better than others – or if the stock market collapses?

And launching a new program would create a massive transition problem: If current workers started contributing into individual accounts, who would pay for the benefits of current retirees? That amount, annually, is considerably more than the nation's defense budget – about $362 billion in 1997.

Supporters of privatization, however, argue that public confidence in Social Security has eroded so far that the only way to restore workers' faith in the system is to give them control. They say privatization alone can strengthen the safety net and restore the long-term solvency of the system without increasing taxes.

Effect on the Budget

Often ignored in the debate is the inevitable effect that the huge increase in payouts to retiring Boomers will have on the federal budget.

That's because, in some ways, the Social Security Trust Fund is a fiction. It technically holds government bonds, but – as a way of disguising the size of the federal deficit – the government doesn't count those bonds as debt.

So in about 15 years, when the trust fund starts turning in its bonds for cash to pay benefits, the government will have to raise that cash. It can do so in only three ways: by increasing taxes, cutting other spending or running a deficit.

A National Dialogue

In his 1998 State of the Union address, President Clinton called for Congress to reserve a budget surplus until steps are taken to "save Social Security first." Clinton called for a year-long dialogue on the subject of Social Security reform, including regional town hall meetings.

This special report includes key stories from The Post on how Social Security works and what can be done about it; a wide selection of authoritative opinion pieces; and Web links and resources that provide a wealth of objective and subjective information .

Dan Froomkin can be reached at froomkin@washingtonpost.com

© Copyright 1999 The Washington Post Company

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