Candidates differ widely on Social Security
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Merton C. Bernstein, LL.B. Social Security |
Merton C. Bernstein has compared the two major candidates' proposals for Social Security. Bernstein is Coles Professor of Law, emeritus, at Washington University in St. Louis. His analysis:
Governor Bush's Plan
Governor George W. Bush would continue benefits unimpaired for retirees and those soon to retire (age 55 and over). For those under 55, he would partially privatize. That means diverting some portion of their payroll tax (probably about 2 percent of cash pay) to individual retirement accounts. Unlike the assured benefits under Social Security, Bush's plan would provide whatever benefits the accumulated funds (less expenses) would produce. While Bush has ruled out a payroll tax increase, the reduced flow of payroll tax would not suffice to fund the promised benefits.
Bush's scenario requires reducing benefits, certainly for those younger than age 55, and, very possibly, for retirees as well. This proposal would very likely include a higher "normal retirement age" - reducing benefits for all who retire after the change. Since such a change would likely be phased in over a considerable period, the younger the employee at the outset of the Bush plan, the bigger the benefit cut.
Bush would apply some of the Social Security surplus to paying down the debt, but more slowly than under the Gore proposal. The remainder of that surplus would be used to establish private accounts.
Analyses for the most recent Social Security Advisory Council show that making good on the promise for retirees and those near retirement would require the infusion of hundreds of billions of dollars. Making the reasonable assumption that providing that shortfall would be done over a considerable period, the impact of such non-payroll taxes would be greatest on young employees.
While the Bush campaign has provided no specifics about this proposal, privatization plans make no explicit provision for continuing to fund the Disability Insurance (DI) program that pays benefits to those suffering serious disablement by injury of disease and their spouses and children. DI now covers all employees under Social Security and is the mainstay of families with a disabled wage earner.
Proponents of privatization assert that disability is an insurable risk and so need not be covered under Social Security. However, DI was initiated because affordable private insurance against such risks has not been available.
Vice President Gore's Plan
Vice President Al Gore proposes to maintain Social Security without any reduction. Rather, he would add a benefit (not specified) for older women who are the poorest of the program's participants. On average, they outlive their spouses and thereby lose that spouse's benefit and the economies of living as a couple. And other income often declines in time. (For example, inflation erodes the value of private defined-benefit pension payments.)
The Gore proposal would make up for the projected funding shortfall by using all of the Social Security surplus to pay down the debt. That would save on interest payments on the debt directly and also would tend to lower interest rates on both public and private debt. That latter would encourage private investment. Usually, as debt becomes due, the Treasury refinances it with new bond offerings. Hence paying down the debt, makes issuing new bonds unnecessary. That would force would-be bond buyers (who are usually plentiful) to invest in other bonds (say for state and local infrastructure) or stocks. This infusion of hundreds of billions of dollars into the investment market would stimulate capital investment, which expands the output of the economy.
In addition, the vice president would use general revenues to make good on benefit assurances. He would do this by crediting to Social Security the savings on debt payments resulting from paying down the debt. In addition, he would tap the non-Social Security surplus to bridge the gap between Social Security's resources and the benefits due. The measures he advocates, under current assumptions, would extend full funding of Social Security to 2055.
The Current Situation
Old Age and Disability Insurance (OASDI) covers about 95percent of the U.S. work force. The largest uncovered group consists of one-quarter to one-third of state and local employees. The program is funded almost exclusively by payroll taxes, paid equally by employees and their employers, including the federal government for its employees and members of the armed forces.
OASDI provides a partial substitute for lost earnings caused by retirement, survival of an insured employee or retiree, or severe disability. In 1999, the most recent year tabulated, some 44.6 million individuals received benefits, including more than 4 million children beneficiaries of disabled workers or survivors of insured employees. Some 2 million adults drew benefits as disabled employees or their spouses. Overall, 6 million more women than men draw benefits, primarily because women, on average, live longer than men.
Based on a 75-year projection (the usual period used to assess long-term actuarial balance), the trustees' report in 2000 determined the Social Security funding shortfall as 1.8 percent of payroll. That is, some combination of benefit reductions and/or revenue improvements, would place the projections in actuarial balance.
Some regard making projections for 75 years as unduly long. In addition, elements of the projection have been questioned. For example, assumptions for productivity have been well below actual recent experience. But the program actuaries and trustees hesitate to make more optimistic projections. Also, pressure to expand immigration could result in a larger work force than currently projected, further reducing the projected funding shortfall. On the other hand, the rate of childbearing is projected to decline, although it has increased in the last few years.
In sum, many analysts now regard the currently projected funding shortfall as readily manageable without requiring benefit cuts or raising payroll tax rates, if payroll taxes are not diverted to private accounts.
The Funding Outlook
In every year since 1983, OASDI collections have exceeded benefits paid. In fiscal year 1999, receipts totaled $515 billion (including almost $11 billion derived from income taxes on benefits). Benefit payments totaled $452 billion, producing a surplus of $53 billion. Cumulatively, such surpluses total $896 billion through fiscal year 1999. The surplus will total almost $3 trillion by 2010. (The Social Security surplus is and will continue to be substantially larger than the non-Social-Security surplus through 2010. Social Security tax receipts will continue to exceed benefit payout until 2015. Fund assets will grow for 20 years - including credited interests on U.S. bonds purchased with the surplus. Tax receipts will pay for the greater part of benefits, but a portion will consist of tapping the surplus. That is, the Treasury will redeem (pay) some of the U.S. government obligations it bought with surplus funds.
Under current projections, the surplus will be exhausted by 2039. At that time, tax receipts would finance about three-quarters of benefits due, if no funding/revenue changes are made before then.
Understand, these "projections" are based on several major variables such as the size of the work force and their earnings. The media and the public have been captivated by the notion that the flood of baby boomers into retirement will overwhelm the Social Security program. This analysis shows rapid expansion of the ranks of beneficiaries and slower growth of the working population, thus worsening the "aged dependency ratio".
However, several factors mitigate this trend, notably higher wages and salaries, which would increase program income from the payroll tax. Such improvements will flow from continuing increases in productivity. That growth lowers the labor cost of additional output of goods and services. That in turn fosters economic growth without serious inflation. Many economists now credit this newly expected expansion to the "new economy" stemming from technological advances.
In the recent past, the work force has been larger than projected due to a leveling off in retirement age (that is, more oldsters are continuing at work than earlier projected). And wages and salaries rose, reflecting improved productivity and a tight labor market. As a result, the funding prospects of OASDI have improved markedly in the past few years. For example, only a few years ago fund exhaustion was projected to occur in 2028. However, the 2000 OASDI trustees' report projects that to occur in 2039. Given the booming economy, that projection will improve when totting up the current year's operations. With continuing productivity gains, Social Security funding would continue to improve.
Any changes to the current program need serious and detailed analysis and fuller public understanding than recent polls show. Otherwise, we could severely damage a program that remains vital to so many disabled and retired Americans and their families.
