Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, November 1, 1994 TAG: 9411140028
SECTION: EDITORIAL PAGE: A-5 EDITION: METRO
SOURCE: BRUCE BARTLETT
DATELINE: LENGTH: Long
In fact, North's views almost exactly mirror those of Sen. John Glenn, D-Ohio, who is not known for being irresponsible. As long ago as 1982, Glenn said that a private, voluntary alternative to Social Security should be established for younger workers, phased in over several decades. This private system would gradually take over a portion of Social Security, which would continue to provide benefits at a lower level.
Indeed, every serious person who has looked carefully at the weak financial underpinnings of the Social Security system knows that fundamental reforms, like those suggested by Glenn and North, are necessary. Such reforms inevitably will place more of the burden of financing retirement on workers themselves. This may take the form of raising the retirement age or lowering benefits, either through means-testing or some other mechanism. The loss of Social Security benefits would have to be compensated for by requiring workers to save more or work longer.
The option of raising taxes, however, is not on the table. Workers and their employers are already paying 7.65 percent of their income into Social Security, making the effective tax rate on wages more than 15 percent. This is well above the tax rate paid by many current retirees. As recently as 1970, the combined tax rate was just 9.6 percent on the first $7,800 of wages. Today, all wages up to $60,600 are taxed. Thus the maximum yearly Social Security tax per worker has risen from $749 to more than $11,000.
This vast increase in taxation was necessary to pay for rapidly rising benefits. The average monthly Social Security benefit for retired workers rose from $123.82 in 1970 to $645.90 as of December 1993. Although much of this increase simply reflects an adjustment for inflation, real benefits also have risen sharply. Putting these numbers in 1993 dollars shows an increase in the average monthly benefit from $461.13 to $645. 90 - a real increase of more than 40 percent.
The major problem for the future, however, is that the number of retirees will increase faster than the number of workers. In 1993 there were 135.2 million workers paying Social Security taxes and 41.8 million beneficiaries, or 3.2 workers per retiree. By the year 2030, the number of beneficiaries is expected to roughly double, while the number of workers will only increase by 20 percent. As a result, there will be just two workers for every beneficiary.
The reason why this is important is because the taxes paid by current workers are really paying the benefits of current retirees. The taxes that the retirees themselves paid went to pay the benefits of earlier retirees. Thus the ability of the Social Security system to pay future benefits is entirely a function of the level of future benefits and taxes.
Since the tax burden on two workers would have to be enormous to pay all the benefits of a single retiree, it is simply not feasible to raise taxes enough to pay all the benefits that have been promised. Inevitably, something must give. And the day of reckoning is coming sooner than most people imagine. As early as the year 2013, current Social Security revenues will be insufficient to pay current benefits.
For these reasons, it is essential that action be taken now to get the Social Security system on a sound footing for the long term. Benefits will have to be scaled back, most likely by raising the retirement age. At the same time, we must make it easier for current workers, especially younger ones, to save and invest for their own retirement. Thus, it is certain that the retirement income of today's younger workers will consist of less Social Security and more private-pension income than is true for current retirees.
All that Oliver North did was make explicit an outcome that is inevitable. Other countries, in fact, are already moving in the direction of de facto privatization of Social Security. According to a recent New York Times article, Chile, Peru, Colombia, Argentina and Bolivia have already moved to shift some or all of their Social Security systems into the private sector. And a recent World Bank report, ``Averting the Old Age Crisis,'' recommends that other countries move in the same direction as quickly as possible.
Thus it is Robb and Coleman who are being irresponsible, attempting to score political points by scaring current retirees into thinking that their benefits will be cut if North is elected. In fact, it is younger workers who will bear the brunt of any cuts in Social Security regardless of who is elected, and such cuts are inevitable.
The sooner we face up to this fact and begin reforming the Social Security system the less painful such cuts will be. North should be congratulated, not condemned, for raising this issue.
Bruce Bartlett is a senior fellow at the Alexis de Tocqueville Institution in Arlington and former deputy assistant secretary of the treasury, where he worked on Social Security issues.
by CNB