Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, May 11, 1995 TAG: 9505110063
SECTION: EDITORIAL PAGE: A-19 EDITION: METRO
SOURCE: RAY L. GARLAND
DATELINE: LENGTH: Long
Those countries more advanced on the welfare-state road than we are hardly know which way to turn. Even left-leaning politicians now seem to understand the choice lies between restraint and bankruptcy.
The United States is the only major industrialized nation in which there is still a sizable body of opinion hostile to the idea that government is obligated to protect all citizens from the hazards of old age, sickness and unemployment. It is by no means a majority view here, but may explain, in part, why our fiscal posture is stronger than most. But the country isn't yet prepared to take even modest steps to prepare for the drain on the nation's resources that will occur when the baby-boom generation starts retiring in a few years.
In 1963, entitlements and interest on the national debt consumed 29 percent of all federal spending. In 2003, if nothing changes, they are projected to take 72 percent. But neither Democrats nor Republicans want to make the first move to change it.
That the country may be ahead of the politicians might be seen in the case of Sen. Bob Kerrey, D-Neb. Kerrey, who co-chaired the Bipartisan Commission on Entitlement and Tax Reform, came out for raising the age for full retirement under Social Security to 70, reducing the growth of benefits and diverting a quarter of the existing Social Security tax paid by workers into individual retirement accounts. All of this was prior to the election last November, when Kerrey stood for a second term. He was returned with 55 percent of the vote!
While Kerrey prospered, his proposals did not. The commission wound up its work by notifying President Clinton the problem was serious and something, they couldn't say quite what, should be done about it.
But Kerrey was on target, especially the part about diverting that portion of Social Security taxes not required right now to pay current beneficiaries into individual retirement accounts. That would keep Congress from using it to mask the true deficit and would give workers real ownership of a small part of the massive sums being extracted from their wages. Just the 1.5 percent Kerrey suggested, and it should be more, could do a lot.
Let's take a couple near the bottom, earning $25,000 a year each. Kerrey's credit would place $750 a year to their personal credit. If that's all they ever made from the age of 25, at only 6 percent compounded, they would still have $123,035 waiting for them at age 65, or $169,131 at age 70. Drawn down on the basis of life expectancy would give them at age 70 an income exceeding $25,000 a year plus Social Security!
Liberals bleat and blow about how the wealth of the nation is being concentrated at the top, and they have a point. But they like so much the role of benefactors of the poor they won't consider a tiny, practical step to empower the poor to provide a portion of their own security with their own assets. And this is the kind of tax cut Republicans ought to be pushing.
A recent report by the brokerage house Merrill Lynch said that half of all the families in the country have less than $1,000 in financial assets. And everybody moans about America's notoriously low rate of savings. But that's largely a myth when you consider that almost 16 percent of most wages is taxed to prepay (supposedly) health and pension benefits in the retirement years. What present workers aren't told is they're paying four or five times over for what they'll get.
The state of Virginia certainly does not face any immediate crisis in honoring commitments to state and local-government employees who have retired or expect to do so. But there are warning signs.
As of June 30, 1994, the Virginia Retirement System held $16 billion in assets, a decline of $63 million from the previous year. That was despite the fact VRS received $135 million more in contributions and earnings on investments than it paid out in benefits.
The decline in portfolio value between 1993 and 1994 can be traced in large part to the relatively poor performance of both the stock and bond markets during that time. This year's report should show a significant increase in portfolio value. But the small dip between '93 and '94 gives a taste of what could happen in a truly bad market. But this is a risk we can't avoid.
A risk taxpayers could have avoided was never assuming total responsibility for retirement benefits in the first place. The old system of requiring state workers to bear a portion of the cost was ended during the governorship of the benevolent Charles Robb, and many local governments followed the state's example of picking up the whole load. Gov. Gerald Baliles then reduced the retirement age for state workers and teachers to 55. The General Assembly and Gov. George Allen have just deployed sweetened VRS benefits to encourage additional thousands of early retirees.
In 1970, VRS had 126,000 active members and fewer than 25,000 retirees. By 1994, membership had swelled to 263,000 and retirees to 73,000. But the number taking retirement will now rise much more rapidly.
At some point in the distant future, some of the VRS investment portfolio can be sold to pay benefits. But much will have to be added to it first. The unfunded liability now on the books will shortly require local and state taxpayers to contribute several hundred million more a year than they have been. Otherwise, Virginia taxpayers of the future will face the same hardship Social Security and Medicare hold in store. But at least we have a real trust fund, not a barrel of IOUs.
Ray L. Garland is a Roanoke Times & World-News columnist.
by CNB