One Cheer for Uncle Sam's New Social Security Statements

October 28, 1999

by Deroy Murdock

MSNBC columnist Deroy Murdock is a co-founder of Third Millennium and a member of the Cato Institute's Advisory Board on Social Security Privatization

NEW YORK - New and improved Social Security Statements are coming soon to a mailbox near you. On October 1, the Social Security Administration (SSA) began sending Americans yearly forecasts of their expected federal retirement benefits.

Look for your SSS about three months before your next birthday. The SSA deserves some credit for the SSS. Giving Americans a glimpse of what Uncle Sam's largest program offers them sure beats the more difficult process of requesting this information.

Still, the SSS will give some Americans the impression that the federal government maintains specific, cash-filled accounts with their names on them, as if the SSA were Citibank.

No such luck. Last year, out of $489.2 billion in total FICA tax and interest revenues, $382.3 billion immediately went to retirees. $3.8 billion and $3.5 billion, respectively, financed railroad pensions and administrative costs. The $99.6 billion balance flowed into the so-called Social Security Trust Fund.

Since 1965, Congress has swiped the Trust Fund for general spending. The Treasury collaborates by substituting Special Issue Treasury Notes (Washingtonese for IOUs) for the cash that Congress devotes to dairy subsidies, nuclear submarines, gasoline for Albert Gore's limousine, etc. The leaders of the GOP Congress promised to halt this fraud in an era of $115 billion budget surpluses. Now they are fidgeting like smokers on a non-stop flight from Tokyo to Newark. By October 21, when a stop-gap spending measure expires, Americans will know whether Congress has kicked the habit and produced a budget that doesn't embezzle the Trust Fund once again.

The SSS barely acknowledges the political risks inherent to a pension system entrusted to politicians. The program has changed in the past to meet the demands of the times and must do so again, it blandly states. The sample SSS (available on-line at http://www.ssa.gov/mystatement/) introduces us to Wanda Worker. She resides at 456 Anywhere Avenue in Maintown, USA. Her benefits estimate concretely illustrates Social Security's shortcomings. Born in 1960, Wanda earns $30,364 annually. The SSS assumes she will receive this wage until retirement.

This naturally ignores the fact that a law-abiding 39-year-old woman can anticipate at least some increases in income before walking into her retirement party. The glass ceiling, thankfully, is not made of titanium. Nevertheless, if Wanda retires early at age 62, her SSS predicts she will earn $6,952 per year in Social Security benefits. If she waits until she reaches the full retirement age of 67, she can look forward to $13,152. If she continues to toil away until age 70, her annual earnings will be $16,380.

Wanda might applaud such figures were she in a vacuum. Too bad the SSS doesn't mention that when Wanda retires, Social Security will pay only 75 percent of planned benefits. If Congress freed Wanda to invest her FICA taxes in her own account, however, her pension checks would swell. The Cato Institute's Social Security Calculator compares Social Security income with likely returns from stocks and bonds.

This resource indicates that if Wanda placed her payroll taxes conservatively in a portfolio solely containing bonds that pay 5 percent interest, she would receive $13,258 by retiring at 62. She would earn $17,927 annually at 67 and $21,446 if she quit work at 70. A portfolio evenly split between bonds and stocks with real annual returns of 7.5 percent (the yearly average by which stocks advanced between 1926 and 1996) would generate $22,072 per-year at age 62.

Retiring five years later would offer $30,714 annually and $37,479 at 70. If Wanda lived on the edge, she could put all her eggs in equities. Again, with 7.5 percent real returns, her annual income at 62, 67 and 70 would be, respectively, $36,388, $52,367 and $65,338. These figures far outrun Social Security, even assuming (foolishly) that the growing population of retirees and shrinking pool of workers will not require future benefit cuts.

Money aside, private retirement accounts would free Americans to choose when to retire. A Chilean-style pension system would permit Wanda Worker to receive benefits once she could purchase an annuity yielding 50 percent of her average salary over her final 10 work-years. Rather than wait for Washington to tell her when she could start her golden years, Wanda could pick a retirement date and invest accordingly.

Comparing the SSS with the potential benefits of a privatized Social Security system dramatizes how much today's system cheats Americans. It also vividly illustrates the true costs of being governed by Republican and Democratic careerists who fear that millions of Wanda Workers might achieve greater freedom and prosperity thanks to capital markets, not Capitol Hill.

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