August 14, 1997

Social Security at 62: Time for Retirement?

by Michael Tanner

Michael Tanner is director of health and welfare studies at the Cato Institute.

Social Security turned 62 on August 14 this year. On that date in 1935, President Franklin Delano Roosevelt signed the landmark legislation that has become America's largest and most popular government program. For more than six decades, elderly Americans have relied more and more on Social Security for their retirement income. But now there is increasing evidence that the time has come to retire this venerable government program.

Few would dispute Social Security's accomplishments. But to focus only on the program's past successes is to take the approach of the man who jumped off the Empire State Building. As he fell, people gathered at each floor could hear him exclaim, "So far, so good!"

Although Social Security will take longer to hit bottom, the destructive impact of the program's long-term failure is already apparent. The system remains a bad deal for most Americans, especially today's young workers. Payroll taxes are already so high that even if today's young workers receive the promised benefits from the taxes they pay in, their Social Security checks will amount to a low, below-market return on those taxes. Today's retirees will generally get back all they paid into Social Security plus a modest return on their investment. But according to the non-partisan Tax Foundation, when today's young workers retire, they will actually receive a negative rate of return -- they'll get less paid out than they paid in! A young worker today would be better off stuffing his Social Security taxes in a mattress than counting on benefits from the program.

Those workers can now get far higher returns and benefits through private savings, investment and insurance. In fact, a study by financial analyst William Shipman demonstrates that a 25-year-old worker who was allowed to privately invest his or her Social Security taxes would receive retirement benefits three to six times greater than Social Security pays.

Just 15 years from now, Social Security will begin to run a deficit, spending more on benefits than it brings in through taxes. In theory, the Social Security system would then begin tapping the Social Security trust fund to pay benefits until 2029, until the trust fund is exhausted. In reality, however, the trust fund is little more than an accounting gimmick. There is no money in the trust fund -- only government bonds, a form of IOU. Redeeming the bonds to pay benefits after 2012 will require a major tax increase on young workers.

Moreover, the prediction that Social Security will avoid a deficit for the next 15 years may prove unduly optimistic. An economic downturn or medical breakthrough could speed Social Security's collapse. Under some projections, Social Security could begin running a deficit as early as 2006.

Anyone sanguine about the future of Social Security should examine a new report on the aging of America from two scholars at the University of Chicago. Charles Mullin and Tomas Philipson examined data from the annuity and life insurance market to make projections of future increases in longevity. Their conclusion: Americans are likely to live much longer than previously predicted. Indeed, they suggest that longevity could increase as much as 5 percent faster than previously estimated. While this is good news for those of us who can expect to live to a ripe old age, it is bad news for those who would delay Social Security reform.

Fortunately, Americans are ready to reform Social Security to ensure that future workers will be able to retire with the same financial dignity as today's retirees. Polls consistently show large majorities in favor of fundamental Social Security reform. Among the most recent is a poll for the Democratic Leadership Council by pollster Mark Penn, which found that 73 percent of Democrats want the ability to invest all or part of their Social Security taxes privately. The only question that remains: when will our political leaders catch up with the American people?

This article originally appeared in The Washington Times on August 14, 1997.