The Bush administration would have us believe that Social Security is about to go bust in a few years, robbing today’s young people of their rightful pensions when it comes their turn to retire. Is this threat real? Or is it intended to advance the president’s plan to privatize Social Security? Let’s look at the facts.
Here is how the Social Security program works. Current workers and their employers contribute to a common pool that pays out benefits to retirees, spouses, children of deceased workers and the disabled. The fund cannot “bust” as long as there are any workers today making contributions to the fund. In a worst-case scenario, future contributions may not be sufficient to meet the promised payments to all those eligible.
But that is not the case now. Social Security taxes currently exceed benefits by $180 billion a year. This surplus is used to buy bonds that go into the Social Security trust fund. The fund now holds more than $1.5 trillion. The surplus is enough, according to the Bush-appointed Social Security Commission, to pay out full benefits until 2042. According to the numbers published by the Congressional Budget Office, that’s enough to last us until at least 2052.
If the economy just limps along at 1.5 percent growth for the next 75 years – half its historic growth rate-at worst, the program might have to reduce benefits to about 80 percent of what it had promised in 2042 or 2052. But because benefits are linked to growth in wages, 80 percent of benefits in 2052 is still more than benefits today, after adjusting for inflation.
To keep its promises for 75 years, the system may require some additional funding, but the amount is not nearly as steep as the administration would have us believe. At worst, the amount would be about half of 1 percent of our national income. That’s less than we’re currently spending in Iraq. And it is only one-quarter of the revenue lost each year because of Bush’s tax cuts on just the top 1 percent of taxpayers. But if the economy grows at anywhere near the levels projected by Bush’s own budget experts, the surplus would never run out.
We cannot escape uncertainty about the future, but we can still be prudent about Social Secur-ity’s future by taking a few simple steps that will ensure that no matter how badly things go, we are able to pay promised benefits. One proposal is to remove the earnings cap so that those with wages above $90,000 pay tax on their entire income. The employee share of the Social Security ax is 6.2 percent of earnings, but someone with annual wages of $180,000 pays a much lower effective rate – 3.1 percent – because of the earnings cap. Removing the cap would virtually eliminate a future funding gap.
Compare this to the Bush proposal to allow individuals to divert one-third of contributions from their Social Security into private accounts. Although put forward as a fix for Social Security it will achieve just the opposite. This diversion would create a real financing crisis, since the diverted funds are already committed to funding benefits for today’s retirees. Divert revenue from the fund and you have to borrow $100 billion to $200 billion a year just to pay current retirees their promised benefits. These “transition” costs are estimated to add up to $2 trillion for the first decade alone. Add this to our existing giant deficit and it will be hard to find a willing lender except at much higher interest rates. And that’s likely to slow economic growth.
Bush’s plan also does nothing to make old age more economically secure. Under the current program, a 49-year-old earning $35,000 would receive monthly benefits upon retirement of $1,132. With Bush’s Plan 2, the benefit would fall to $994 – an amount that includes earnings from the individual’s private plan. Why would benefits drop?
First, Bush’s plan cuts Social Security benefits in the future for all beneficiaries – including the disabled, survivors and children – not just those who adopt private accounts. Second, the rate of return on private accounts, after deducting administrative costs, is likely to be too low to make up for the benefit cuts.
Retirement plans rely on a three-legged stool: savings, employer- financed pension plans and Social Security. There has been a steady decline in employer pension provisions for several decades, and many lost a large part of their savings in the recent stock market collapse. Ironically, the one sure leg retirees can count on is Social Security. Fortunately, the system is financially solvent and will remain so – unless its detractors can succeed in convincing the public of a crisis that does not exist.
Stephanie Seguino, a Bangor native, is associate professor and chair of the University of Vermont Department of Economics.
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