May 15, 2002

Social Security Must be Reformed

by William Shipman

William G. Shipman is chairman of Carriage Oaks Partners LLC and co-chairman of the Cato Project on Social Security Choice.

As the White House has increased its support for strengthening Social Security, opponents have introduced another reason why reform should not take place: the budget is in deficit.

The surplus has been squandered by last year's tax cuts, they argue, therefore the administration's objective of fixing Social Security must be put on hold. Stated a bit differently, if the president would only raise taxes we could address Social Security's financial problems forthwith. This political logic attempts to put the president into a box of his own making. Others think that reform should not wait, because the sooner it happens the less expensive it will be. In their recent Annual Report, the Trustees of the Social Security system argued that Social Security "deficits projected for the longer run should be addressed in a timely way to allow for a gradual phasing in of any necessary changes and to provide advance notice so that workers can adjust their plans to take account of those changes. The sooner adjustments are made, the smaller and less abrupt they will have to be."

The argument to postpone reform because of the current budget deficit is entertaining theater in which Washington's thespians of all ideological persuasions can play their assigned roles. But it has very little to do with the substance of Social Security's financial challenges. The main reason that Social Security is in trouble is demographic: people are living longer and families are having fewer children. The combination of these two realities shrinks the number of workers relative to retirees eligible for Social Security benefits. In 1950 there were 16 workers paying taxes for each retiree. Today there are 3.4 workers and in 2030 there will be only two.

Given Social Security's pay-as-you-go financing, it is axiomatic that promised benefits can be delivered only if taxes are continuously raised. Indeed, as the relative number of workers declined over the last five decades, the maximum payroll tax increased about 1200 percent even after adjusting for inflation. Without reform, the future holds the same. Tax increases, or benefit cuts for that matter, approach the Social Security financial challenge in strictly cash flow terms. Neither reverses increasing life expectancy or below-replacement birth rates. Both are a financial patch. But as the relative number of workers falls, tax increases ultimately hit a political wall. At some point people sense that their taxes provide them little security relative to what they could have by saving and investing a like amount of their resources in wealth producing assets. We may now be facing the wall.

This article originally appeared on Fox News on May 15, 2002.