ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Thursday, January 16, 1997 TAG: 9701160016
SECTION: EDITORIAL PAGE: A-9 EDITION: METRO
SOURCE: GEORGE MAROTTA
STARTING when the Social Security program was begun in the mid-1930s, the federal government has made huge mistakes in its basic design and implementation.
In the depths of the Depression, it was thought that the number of jobs was finite. If we could get some older workers to retire on Social Security, that would create jobs for younger folk.
Today, we know this is not true. But in those days employment was even denied to women whose spouses had jobs!
The biggest federal blunder was in not indexing the age of retirement to life expectancy. In 1935, the average life expectancy was 65, and the government expected that only half of the workers would ever collect any payments. Today, most workers collect for more than 10 years.
Furthermore, because of Social Security, most workers now retire earlier. Many take that step at age 62, when they are eligible to receive reduced benefits.
When the program began, the average male worker retired at age 69. Today, the average male retires at age 64 and then lives to 83!
The government incorrectly estimated the rates of both population growth and economic growth.
At the beginning of the program, there were many workers for each retiree. Beginning about 2030, there will be only two workers for every retiree!
Another mistake was indexing benefits to increases in the cost of living. This has increased payments significantly.
In addition, we now learn that the cost-of-living adjustments, or COLAs, have been overstated for many years by as much at 1.1 percent annually! (When the government makes a mistake, it always turns out to be a really big one.)
Other large federal miscalculations include the Medicare program, which is rapidly approaching bankruptcy, and insuring bank accounts for up to $100,000 each, which has cost the taxpayers billions of dollars.
In light of all the really big errors that government has made with regard to the Social Security, it is ironic to learn that some members of the Social Security advisory committee are worried about giving workers the right to make their own investment decisions in a partially privatized Social Security program.
The committee members split into three groups with regard to letting workers put some of their Social Security retirement monies in something other than low-paying federal government bonds (which are being used to fund the current government deficit and debt).
One group (which has faith in individuals) would allow workers to invest part of their Social Security tax in the stock market or in whatever investments they choose in ``personal security accounts.''
This group was led by corporate executive Sylvester Schieber and economist Carolyn Weaver.
Another group (which has more faith in government than in individuals) would have the government choose investments that would be held in a common pool.
``We do not believe that the nation's basic retirement system should require everyone - the knowledgeable and the inexperienced, the lucky, the rich and the poor - to bear investment risk as isolated individuals,'' said a former Social Security commissioner, Robert Ball.
A third group, led by panel chairman Edward Gramlich, a university official, wants a compromise between the first two.
This group would allow workers to choose investments from a government-approved list of investments.
It is well-known that workers who have invested their individual retirement accounts or their 401(k) retirement plans in common stocks have benefited greatly from an average annual rate of total return of more than 11 percent in recent years.
The lowest-income workers would benefit the most from an opportunity to invest in common stocks because their payroll taxes are often the only amount they can set aside for their older years.
Sure, some workers would make poor decisions, but at least the decision-making would be decentralized.
Something drastic needs to be done to correct the current Social Security program. It will run out of ``trust'' funds in about the year 2012 and completely break down in 2029.
The current system is a very bad deal for the younger generation. Generation X workers (those in their 20s, mainly) contribute over six times more than the earliest Social Security participants.
Moreover, the FICA payroll-tax payments they make are subject to income taxes. And once they retire, if they earn too much (if they have been prudent in other savings), 85 percent of their benefits will be taxed. Thirty-five percent of their contributions are thus taxed twice!
Most younger workers know that if they could invest their retirement monies directly they could achieve a return twice that of Social Security.
They have little confidence that Social Security will be there on their retirement. (A recent survey found that more Generation X workers believe in UFOs than in the Social Security program.)
The Social Security program has often been described as a Ponzi scheme. The earliest retirees benefited greatly, the next group is breaking even and most of the young Generation X workers will not even get their investment back.
In other words, the federal government is getting away with the same thing for which it jailed Charles Ponzi.
During the presidential election campaign, neither major candidate mentioned the need to alter the Social Security program. It was considered the ``third rail'' of politics - touch it and you're dead!
We need to agree on changes soon in order to reach a decision before the next major election period.
Opening up Social Security to investments in common stocks will greatly benefit our capitalistic system.
Of course there is risk involved in the selection of individual common stocks. However, there are many fine, diversified mutual funds that would be an ideal medium for personal security accounts.
Certainly, individual workers cannot do worst than the really bad central decisions made by our government over the past six decades in our present ``social insecurity'' program.
George Marotta is a research fellow at the Hoover Institution, Stanford University, and portfolio manager of Marotta Asset Management.
- Knight-Ridder/Tribune
LENGTH: Long : 113 linesby CNB