By Steven Pearlstein
From some angles, it looks to be a pension plan offering monthly retirement benefits commensurate with contributions. From others, it's an insurance policy against disability or untimely death. From still others, it has all the contours of a massive welfare program that transfers income from the young to the old and from the rich to the poor.
In fact, Social Security has tried to do all of these things. But as a result of unfavorable economic and demographic trends in recent years, meeting all those goals no longer seems possible and some trade-offs are required. That's why a blue-ribbon panel of experts has concluded that the system should be reconceived, the parts unbundled, and each part reformed to make it more efficient and politically sustainable.
Now the debate begins over how to do it. Within minutes of the release of the panel's report yesterday, Washington interest groups and ideological camps moved to claim that one plan or another would "save" the popular retirement system while the other would bankrupt the country or leave the elderly to live out their years in poverty.
At the core of most of these hard-edge positions lay one of several popular myths about Social Security that can be as misleading as they are widely believed.
Below is a brief guide around those myths and through the economic, demographic and political thickets of Social Security:
Myth No. 1: Social Security is a "Ponzi scheme."
In his recent book, investment banker Pete Peterson derides and dismisses Social Security as "a vast Ponzi scheme in which the first people in are big winners and the vast array of those who join late in the game lose."
There is a germ of truth in this: Like a Ponzi con game, Social Security only works if there are fresh people to bring into the system each year. But unlike a private Ponzi scheme, Social Security has one big advantage: It is backed by the power of the government to compel everyone to participate. And unlike many fraudulent schemes, it is not limited to the current population for its growth but can rely on a steady influx of new young workers each year to replace those who are cashing in.
Indeed, as long as lots of new workers continued to earn more money than those before them, Social Security will thrive, wrote Nobel Prize-winning economist Paul Samuelson in 1967. "A growing nation is the greatest Ponzi game ever contrived and that is a fact, not a paradox," he wrote.
Unfortunately for Samuelson and for us, some of those "as long as's" didn't turn out to be immutable.
Population growth slowed dramatically after 1960 as women began to have fewer children, with the average dropping from 3.5 in 1960 to 1.8 in the mid-1980s.
At the same time, retirees began to retire earlier even as they continued to live longer. Back when Social Security was started, the average male worker retired at 69 and, if he made it that far, lived to the age of 77. Today the average male retires at 64 and, once retired, lives to 83. That's 11 more years of collecting benefits.
Add it all together and it means that by 2030 there will be only two active workers supporting each retiree in the pay-as-you-go Social Security system instead of the three workers of a decade ago.
On top of those demographic trends was an equally powerful economic one: The rapid growth in average wages slowed to a virtual halt in the 1970s as global competition and technology held down wage gains and workers took a greater share of their pay in nontaxed fringe benefits.
Despite these trends, Social Security can continue for another 75 years if retiree benefits are gradually decreased by 1 percent a year or the tax rate used to support it is increased by about 0.25 percent a year, or some combination of the two.
Myth No. 2: Social Security is a bad investment.
If the combined employer-employee contribution were invested in an average stock mutual fund, it could generate pension checks at least twice as big as Social Security's.
But Social Security is not simply an investment vehicle or a pension program and never has been. By design, it's a complex social program that 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 those who die early to those who die late.
The insurance aspects of Social Security also skew the returns. In auto insurance, drivers who are unlucky enough get into accidents get more money from their insurers than drivers who do not. Along the same lines, about one-fifth of payouts under Social Security go to wives and children of workers who are disabled or die before they have been able to contribute to the system over a full 40-year career.
From a strictly return-on-investment point of view, Social Security isn't as good a deal as it used to be.
In the early years of Social Security, when many people received full benefits without contributing into the program for their entire working life, they typically took out twice as much money as they put in.
But since 1980, the ratio of benefits to contributions has begun to decline for many reasons. One is that more workers live to collect the benefits. Another is that payroll taxes have been raised to keep the program solvent.
According to C. Eugene Steuerle, an economist at the Urban Institute, most baby boomers will continue to take more money out of the system than they put in; the exception will be those with high lifetime earnings.
But by the time the Generation Xers, those aged 25 to 34, retire beginning in 2030, Steuerle warns that the only positive returns will be enjoyed by one-earner couples and two-earner couples with moderate or low lifetime earnings.
Myth No. 3: Retirement costs will sink the economy.
A common fear is that when members of the giant baby boom generation turn 65, they will have saved so little for their retirement that they will either have to live in poverty or force their children to pay exorbitant taxes and endure declining standards of living.
But that ignores the fact that the economy is likely to continue growing, providing enough extra money to finance Social Security even as overall living standards rise.
Robert Eisner, a University of Chicago economist, uses a simple calculation. Today, a family earning $50,000 a year pays $5,100 a year in taxes to keep the system going, counting both the employer and employee portions. That leaves the family with $44,900 for other things.
Now jump ahead to the year 2030 when, that family's Social Security taxes will have to be raised to $9,620 a year to keep benefits at the same level. But during that 35 years, the productivity and output of the economy will have grown about 1 percent a year, giving the same family an inflation-adjusted salary of $65,000. Even after paying the higher payroll tax, the same household will still have $55,380 to spend roughly 25 percent more than the comparable family a generation earlier.
It also is not true that today's workers head toward retirement with fewer resources than their parents. According to the Congressional Budget Office, the median household income for baby boomers was more than 50 percent higher than the median household for a similar age group back in 1959, even after adjusting for inflation. The CBO also found that the typical baby boomers had accumulated savings and other assets that were 85 percent higher than their parents.
How is it that this data can be squared with the general feeling that the boomers are saving too little and spending too much? A panel of technical experts retained by the Advisory Council put it this way:
Future retirees will have higher inflation-adjusted incomes in retirement than today's retirees, but probably not enough to maintain their somewhat extravagant pre-retirement standard of living.
Myth No. 4: The stock market can save Social Security.
Wall Street loves to point out that, by lending its reserves to the government at 5 percent interest rather than getting 10 percent a year returns in the stock market, Social Security is leaving lots of money on the table and denying the economy capital needed for investment and growth.
"Beware of magic money," warns Steuerle, reflecting the view of many economists and actuaries.
The reason is simple: The stock market would not perform up to its historic average if the government or individual workers suddenly shifted an extra $1 trillion into a $6 trillion stock market. According to economic theory, that would surely drive up stock prices and thereby drive down the returns from stocks from that point on. And the shift from bonds to stocks would drive down the price of bonds and raise interest rates.
The result, according to Peterson, is that the total amount of capital available to the economy would not change at all. And the favorable spread between stocks and bonds would shrink. Social Security might wind up with a bit more money in its trust fund, but the rest of the debt-strapped federal government would face higher interest payments and could well wind up worse off.
Myth No. 5: Individual accounts will erode political support for social insurance.
Liberal critics of the various reform schemes argue that by allowing workers to have some form of individualized Social Security account, public support will erode for the basic first-tier benefit on which low-income elderly depend.
"Ever since the Elizabethan Poor Law of 1601, programs only for the poor have been lousy, no good poor programs," Wilbur Cohen, then secretary of health, education and welfare, wrote 20 years ago. "And a program that is only for the poor . . . is in the long run a program the American public won't support."
But recent public opinion polls show support for Social Security already is eroding, particularly among younger workers who fear it won't be around by the time they retire. Focus group research shows continued strong support for a basic universal pension at or above the poverty line, if for no other reason than most workers have parents whose financial security they would like to guarantee. But workers also insisted on getting a good return on their own retirement savings. They cited favorably their experience with 401(k) retirement plans that allowed them to manage their own funds and now account for one-third of all private pensions.
In the end, there appear to be political risks on both sides of the Social Security divide, much as there were with welfare reform. The risk of proceeding with fundamental reform is that it becomes the first step on a slippery slope toward the program's demise. On the other hand, the cost of trying to maintain a program many voters lack confidence in runs the risk that they will finally turn their backs on it.
It may be appropriate to recall another bit of advice offered by Wilbur Cohen:
"I do not believe that our present Social Security system is the last word nor do I believe it should be immune from change," Cohen wrote. "On the contrary, I believe that each generation should be free to remake and remold it to its needs and liking."
© Copyright 1997 The Washington Post Company