I’m reposting this because the hamster on our hard drive apparently went for a break yesterday without first securing a replacement, so a lot of you saw Friday’s column instead. (Also, this gave me a chance to tweak it a little.) Tomorrow: calling home free for the holidays. But today:
Here are some things to know:
1. The system is not going broke. For now, it takes in $180 billion or so each year more than it pays out – even though we have only 3 workers for every retiree (down from 41 when the system was launched).
2. Yes, it would be much, much better if we had not decided to blow that annual surplus on a tax cut to rich people. (Imagine taking your daughter’s hard-earned college fund and just giving it away to some rich stranger.)
3. And, yes, in a few decades there will be more like 2 workers for every retiree instead of 3. At that point, instead of running surpluses, Social Security could be running deficits (which today’s surpluses were meant to fund).
4. But it’s not as if Social Security benefits would disappear. They just might be (oversimplifying wildly here, based on two workers instead of three) 2/3 of what they are today. Which is why we need to make some adjustments . . .
5. Here’s one example of relatively painless adjustments that would solve the problem without ‘privatizing’ Social Security. (I’ll get to that in a minute.)
You would just take a little from column a, column b, and column c:
a. Right now the age at which you can retire with full benefits inches up to 67 by 2027. What if it kept rising one month per year, to age 68 in 2039? You could still take partial benefits as early as age 62; for full benefits, you’d have to wait one more year. But you would have 30 or 40 years (if you started now) to save a little extra to keep this from being a hardship.
b. Few advocate raising the already hefty payroll tax RATE, currently 6.2% each from you and your employer (plus a further 1.45% each for Medicare). But what if, instead of having that 6.2% drop to zero on income above $90,000-or-so, as it does now, it dropped to 1% instead? Annoying, but not a killer; and worth paying so that grandma – much as we love her – doesn’t have to move in.
c. Once you start receiving benefits, they rise with inflation, as they should. And in calculating your initial benefits, your prior years’ contributions are adjusted for inflation as well. If we made those adjustments based on ‘price inflation’ rather than ‘wage inflation,’ the system would save a fortune. Indeed, we probably wouldn’t need to do (a) and (b) – just (c). But some combination of the three is likely to go down easiest.
So that’s it. As I wrote in PARADE a year or so ago: ‘A bit of pain around the edges, with plenty of time to prepare for it – and the Social Security problem is solved.’
6. We don’t need privatization, much to the regret of an army of Wall Streeters who thrill to the prospect of trillions more dollars to take a tiny piece of each year. I would regret it, too, if I were on Wall Street.
Here are the things I think people should know about privatization:
a. Our retirement system is already privatized! Your IRA! Your 401(k)! Your 403(b)! Your SEP! Your Keogh Plan! These are great private accounts and everyone should do his or her best to contribute to them, because:
b. Social Security, even once fixed, will not provide a comfortable retirement . . . nor, at least in recent memory, has it ever or was it ever intended to. It is a safety net. It should provide subsistence for folks who, through irresponsibility or bad luck – or uncommon longevity – have nothing else to fall back on. For everyone else, it should provide no more than a welcome supplement to a lifetime of prudent, private, saving and investing. Even if we privatized accounts, we’d still need a safety net.
c. There is no free lunch. The thought is that – even with the cost of administering 150 million new private investment accounts – individuals would come out ahead because (as we all know) over the long run, stocks outperform bonds.
By this reasoning, no long-term investors should buy U.S. Treasury bonds (or any other kind). Not us, not insurance companies, not the Chinese and Japanese – the interest rate is too low; you’ll come out ahead if you invest in stocks.
But if no one buys our Treasury bonds, how do we fund our massive deficit? How do we refinance our nearly $8 trillion National debt (most of it run up under Presidents Reagan, Bush, and Bush)?
Simple: The Treasury would have to raise interest rates high enough so that people would buy our bonds. At which point two things would have happened:
- First, we would have made it much more expensive to finance our ever-growing debt, saddling American taxpayers with that much more in annual interest expense. (Raise the cost of funding the $8 trillion debt by 4%, and you add $320 billion to our deficit . . . or else you have to raise taxes by $320 billion a year to pay the extra interest.)
- Second, we would have made Treasury bond yields a lot more attractive relative to stocks. (So why the great rush out of bonds and into stocks in the first place?)
If we lived in a world starved for equity capital, one might make the argument that tilting the world’s investments a little more toward risk could enrich us all. But do great productivity-enhancing investment opportunities really go begging today for want of capital? And if so, are American workers really the best ones to make those capital allocation assessments?
d. If workers are allowed to funnel a portion of their payroll tax to private accounts – yet we plan to keep paying full benefits to current retirees – how do we make up the shortfall? The current answer seems to be that we will just borrow $1 trillion or $2 trillion more. And we will do that by issuing more Treasury bonds we think no one should buy.
The simple truth is that privatizing a portion of the safety net is not necessary – and wouldn’t work. The only clear beneficiary would be the financial services industry, shifting the balance of wealth yet a bit more away from workers, in favor of a wealthy few. And that’s not sufficient reason to mess up a system so integral to our social fabric.