Making Social Security Secure

Making Social Security Secure

Making Social Security Secure

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Herb Stein
3:05 p.m.  Friday  7/12/96


In only about 15 years from now the large number of people born in the prolific decades after World War II, the baby boomers, will start to retire and claim their Social Security benefits. But the benefits may not be there for them. The accumulated reserves of the Social Security system plus the payroll taxes on the working population may not be enough to pay the benefits. That is partly because much of the taxes the boomers paid in to the system while they were working was paid out to the older generation (including me). But the boomers cannot count on the next generation to repay the favor, because retired boomers will be very numerous relative to the size of the working population.

Three kinds of policies seem to be available to deal with this situation:

A. The promised benefits could be reduced. The age at which workers qualify for benefits could be raised, the adjustment of benefits for increases in the cost of living could be limited, or the benefit formulas defining the size of benefits could be shaved.

B. Additional revenues could be provided, either by raising the rate of Social Security payroll tax or by contributions from the government's general tax receipts.

C. Most attention is now being paid to what is called "privatization." The idea is that part of the Social Security taxes now being invested in government bonds should be invested in private assets like common stocks.

These private assets would presumably yield a higher return than is earned on government bonds, and that would permit the retirees to get higher benefits than are possible under the current system. This plan is attractive because it does not seem to require anyone to give up anything, the higher benefits coming from higher earnings. Yet the plan raises many puzzling questions. For example, under present arrangements the rest of the government, other than Social Security, will go on for many years running a deficit that it will finance in part by borrowing from the Social Security system. If it cannot borrow from Social Security because those funds are being invested in private assets, where will it sell its bonds? Presumably to private investors, is the answer. Will these be the same investors who would otherwise have bought the private assets that are to be bought with the Social Security taxes under the privatization plan? What will be the implications of that, for total investment in the nation and for the interest rate the government has to pay on its debt?

To say that there are these questions and others is not to say that there are no satisfactory answers. It only suggests that more explanation is needed beyond the word "privatization," which fascinates some and frightens others.