What Social Security Needs Is a ‘Publicization’

Federal Reserve Board Chairman Alan Greenspan says Congress must move quickly to fix Social Security, and he urges lawmakers to consider a phased-in privatization of the nation’s retirement program.

Greenspan is not alone. Proposals to “fix” Social Security abound. Most of them would fix it by chipping away at it--cutting benefits--whether by reducing cost-of-living adjustments; by raising the retirement age still further; or by diverting some of the system’s contributions, and the benefits paid, to the stock market.

Social Security can certainly be improved, but if it’s not broke, we don’t have to fix it. The notion that Social Security is broke stems from one of the long-run projections of the Social Security Fund Trustees. By 2014, according to that “intermediate” projection, the amounts being credited each year to the funds, mainly from our payroll taxes, will no longer exceed the amount being charged to the accounts for benefits paid. And by 2030, according to that same projection, the accumulated balances will have been exhausted so that the funds can no longer finance the benefits expected to be due at that time.

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For one thing, long-run projections are notoriously inaccurate. Even short-term forecasts of the economy, the stock market or anything else are frequently worthless. The Congressional Budget Office, for example, kept lowering its projection of the federal 1997 budget deficit from $165 billion in May 1996 to $125 billion three months into the fiscal year. The actual deficit finally came in at about $22 billion. And the CBO has now changed its predictions about future years from deficits to surpluses.

The trustees’ intermediate Social Security projection is one of several. They also put out a “low-cost” projection, which foresees no problem at all. It assumes 2.5% annual inflation over the long run and 5% unemployment. (The current unemployment rate is 4.7% and the current inflation rate is less than 2%.) I wouldn’t bet much on any projection, but the more optimistic “low-cost” one would seem as reasonable as any.

The real point is that the bread we eat today is produced by those working today. And the bread to be produced in 2030 will have to be produced by those working in 2030. Putting more money into trust funds, public or private, or putting it under the mattress or in the stock market, will in itself do nothing to provide that bread.

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Individuals today can put claims upon others tomorrow by accumulating financial assets. But the only way, as a nation or as an economy, that we can provide more for the future is to provide more productive capital, public and private, physical and intangible and human, that will be turning out what we live by in the future.

That means not only private business investment, which in a market economy can be expected to be whatever is profitable. Most important, and controllable by society, are the education and training and the basic research encouraging technological advance supported by government. Also contributing would be increasing birth rates and immigration to provide more workers. And vitally important, of course, is that there be full employment for all those able to work.

But cutting Social Security benefits now does nothing for the future. And, indeed, there is no justification for cutting them later. In a growing, prosperous economy, we can all afford to live better. Neither is there any excuse to cut into Social Security in order to finance private stock market investments, however huge the brokers’ commissions and other profits of their promoters would be.

We must in no way diminish the basic Social Security that has served us so well for more than six decades, finally getting those 65 and over to the point where their poverty rate is no higher than that of the working population. Social Security offers insurance that provides a floor or safety net to all, regardless of start in life or mishaps and hardships along the way.

It is true, though, that Social Security offers only minimal benefits, replacing about 40% of workers’ wages. Annual benefits currently average only about $10,000 per household. Privatizers hence hold out an attractive lure of investing in the stock market and earning much more; over the last 20 years, the annualized return on the Standard & Poor’s 500-stock index has averaged more than 16%.

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Private investment, however, whether directly in the stock market or in private pension plans, 401(k)s or individual retirement accounts, does not offer what Social Security does: an actuarially fair annuity and automatic protection against inflation after retirement.

Therefore, I would propose “publicization.” I would offer all participants in Social Security a chance to make voluntary additional contributions to Social Security, with the same tax advantages as under current private IRAs and 401(k)s. These funds then would be invested in a passively managed stock fund tied to a market index, in a bond fund or in Treasury securities. These supplementary contributors would have their Social Security benefits increased on the basis of their investments, with the trivial administrative costs of Social Security and with the actuarially fair returns and cost-of-living adjustments after retirement, which privatizers cannot offer.

There would be some side benefits to society with this. The increased contributions and the returns from them would increase the Social Security trust fund balances and lower our measured budget deficits, both a source of (unjustified) worry to some. They might also increase total private saving.

But most important, they would help protect the benefits of the great majority of elderly whose support still comes mainly from Social Security, and would allow a majority of the young to provide more for their future in a way that is efficient and profitable.