Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, October 17, 1994 TAG: 9410180023
SECTION: EDITORIAL PAGE: A5 EDITION: METRO
SOURCE: ROBERT MYERS
DATELINE: LENGTH: Long
Since going to work at Social Security in 1934 (when it was housed in a few rooms down the street from the White House and was called the Committee on Economic Security), I have seen the critics come and go. Right now they are back, and polls indicate that public confidence in the system is weak, especially among young workers.
If you look just at the estimates of the actuaries, whose job it is to predict the financial futures of insurance and pension funds, then Social Security is headed for a cliff. But that's only part of the story. It doesn't take into account human nature and political reality.
For 23 years I served as Social Security's chief actuary. Actuarial estimates sort of fire a shotgun at the future, and the truth often lies somewhere around the middle of the pattern. These middle-of-the-road forecasts may be too optimistic or too pessimistic, but they're as good as any.
Current figures show that the system will have no problem paying benefits until the year 2029 - when Social Security, incidentally, will be 94 years old.
Between now and the year 2018, Social Security will make money. Even as the number of retirees continues to grow, so do the trust funds.
The first signs of financial trouble show up in the year 2013. The amount of money coming in from taxes this year will equal the money being paid out in administrative costs and benefits: $1.01 trillion. But the trust funds will continue to grow because of the millions of dollars in interest they are collecting.
By the year 2018, annual spending on benefits will be a record $1.45 trillion. Nevertheless, the assets of the Social Security trust funds will reach the highest level in history: $3.02 trillion.
The money in the trust funds is held in government bonds. Some critics concentrate their fire on these bonds, saying the money is shuffled around in a ``shell game'' to pay for other government operations, or implying that the money simply has been exchanged for a bunch of worthless government IOUs.
In truth, this money is invested in the same bonds that are bought by mutual funds, banks and individuals. It's an investment, and pays a fair rate of interest. The fact that the money isn't lying around in a cash account somewhere shouldn't alarm anybody. Banks, for example, don't take your money and throw it in the back of the vault. It is ``spent'' - that is, loaned out - as fast as the bank can find a suitable borrower. The bonds held by the trust funds - as well as the interest paid on them - are just as valid as other government bonds.
By the year 2019, the money coming in from taxes and interest isn't enough to pay the benefits, and Social Security has to start selling its bonds. This year begins a financial landslide that is the beginning of the end. A trust fund that took more than 80 years to build up is hemorrhaging so badly that it will disappear in just 10 years, by June 2029.
This is what doomsday would look like. But none of us is ever going to see it. Some 80 million retirees and survivors will be drawing benefits from Social Security the year it's supposed to go broke. Having them go from a check one month to nothing the next is unthinkable. The country wouldn't stand for it.
Fixing the system is easy. But finding the fix that fits both politically and financially is trickier.
I see no problem with setting the ``normal'' retirement age, the earliest one at which unreduced benefits are first available, at 70. After all, our life expectancy is far longer than it was in 1934. Besides, as a social policy, there's nothing wrong with saying that working is good for you. There would, of course, be provisions for people who want to retire early or are too disabled to hold a job.
Raising the age to 70 instead of the 67 now scheduled in law, doing so gradually but somewhat more rapidly, would take an enormous amount of strain off the system, fixing it until the latter half of the next century. Raising it just two more years - to age 72 - could likely keep Social Security solvent forever.
Another option is to raise the tax rate. The rate already has been raised 21 times since the government started collecting the Social Security tax in 1937.
In the first year, the rate was 2 percent, half to be paid by the employer and half by the employee. The most any employee had to pay in taxes that year was $30. By 1994, the tax rate excluding Medicare was 12.4 percent, still divided between employer and employee, and the maximum annual payment hit $3,757.20 for each party.
Raising the rate to 17.4 percent in 2036, with employer and employee each paying half would have the same effect as boosting the retirement age to 72: Social Security would run forever.
Politically, neither one of these solutions will fly alone.
The problem of public confidence has been caused by today's ``roller-coaster'' financing - watching what happens as a huge trust fund is built up, and then goes downhill rapidly.
A huge trust fund isn't necessary, however. In a private plan, it is necessary to build up reserves because of the possibility that the employer might go out of business. This gives some guarantee to participants and pensioners that the promised benefits will be paid. In a national program such as Social Security, this is not necessary. It can be assumed that the national government will last forever.
This is an argument for ``pay-as-you-go'' financing, which is the way the system was bankrolled in the 1960s and early 1970s. Under such a financing system, the trust-fund balance would equal only the approximate amount that will have to be paid out in benefits for a year. This would cushion the system against economic shocks and give breathing room to political leaders who might have to step in sometime in the future to make some adjustments. It would maintain the system on a constantly solid footing, instead of the current scheme that either has the program awash in money or falling into the abyss.
All in all, the Social Security system has worked. The American people can be secure in the knowledge that it will outlive us all.
Robert Myers, one of the architects of the Social Security system, is chairman of the National Advisory Board of The Seniors Coalition in Alexandria. He was chief actuary of the Social Security Administration from 1947-70, deputy commissioner of Social Security in 1981-82, and executive director of the National Commission on Social Security Reform in 1982-83.
Knight-Ridder/Tribune News Service
by CNB