|
Continued from previous page
It’s vital, Mitchell adds, that reform not be postponed
because many disillusioned young people already believe
that Social Security “won’t be there for them” when
they retire.
“One reason young workers today feel worried about the
system is that they don’t know what’s going to happen,” she
notes. “They don’t know if they should be saving more or
working longer. That’s why I propose that reform should
happen sooner rather than later. People could then … do
what they needed to do to meet the new rules.”
A Pay-As-You-Go System
How did Social Security get into this mess? Launched in
1935 as part of the New Deal, Social Security is a pay-as-you-go
system, which means that the taxes paid by today’s
workers and employers provide just enough money to pay
benefits to today’s recipients. (By law, any Social Security
income not needed to pay benefits must be invested in Treasury
securities. Trust fund assets are allowed to build up only
to the extent required to prevent exhaustion of the trust
fund by what the government calls “short term economic
fluctuations.”) The pay-as-you-go aspect of the system generally
makes Social Security different from most private
pension plans, which are funded — meaning that benefits
owed to retirees and current workers could be paid by money
already in hand.
A key problem is the decline in the number of employees
per beneficiary. In 1960, 5.1 workers paid Social Security
taxes for each retiree. In 1996, the ratio was 3.3 to one. By
2030, as the number of older people continues to grow, the
ratio will shrink to two workers per beneficiary.
What’s more, unlike a 401(k) plan, Social Security is not
merely a retirement system. It is also an antipoverty program
designed to redistribute income so that poorer workers have
a safety net to help them in old age. “It was no accident that
the Social Security system began in the Great Depression
when many people had their savings wiped out,” notes
Andrew Abel, Robert Morris Professor of Banking, Finance
and Economics.
As a social insurance program, the system has worked
remarkably well. According to U.S. News & World Report, only
one in 10 seniors is poor today, compared with one in three
in 1959. Today, seniors are the age group least likely to live
in poverty. About two-thirds of today’s Social Security recipients
receive at least half their income from the system. In
fact, Abel notes, those people who joined the system in its
first few decades “got very high rates of return” in the form
of handsome benefits relative to what they contributed in
payroll taxes.
Social Security also pays benefits to disabled workers who
have not reached retirement age, to spouses and children of
retired and disabled workers, and to spouses and children of
deceased workers. In fact, retired people make up only 62 percent
of all beneficiaries, according to the Social Security
Advisory Board.
If you think most Americans understand how Social Security
works, consider this unscientific piece of evidence:
Marshall E. Blume, Howard Butcher Professor of Finance,
tells how he once gave a talk to a community group about
personal finance. Several educated, well-off attendees told
him they believed that the Social Security “contributions”
made by themselves and their employers over the years went
to accounts with their names on them in Washington, to be
drawn from upon retirement.
Three Options for Reform
At the heart of the debate over reform are questions about
the fundamental nature of Social Security: should it have at
its core the goal of redistributing income, as favored by the
political left, or should it be more like a straightforward
retirement plan, as favored by the right?
This is one reason why Social Security is so hotly debated.
“You get into not only the fiscal aspect of Social Security,
but people’s values,” says Jerry Rosenbloom, Frederick H.
Ecker Professor of Insurance and Risk Management.
As a starting point, Congress will likely focus on three
options that were contained in a 1997 report by the 13-member
Advisory Council on Social Security. The council could not
reach agreement on a single proposal, so they drafted three,
each of which was supported by different members. (The
advisory council has been replaced by the five-member Social
Security Advisory Board, which has taken no position on the
options put forth by the predecessor group.)
One proposal, dubbed the Maintenance of Benefits plan
(MB) and supported by six council members, would keep the
current Social Security tax and benefit structure pretty much
as is. But, among other things, it would increase taxes on
Social Security benefits, cover newly hired state and local government
workers not currently part of the system (a move
that would bring new revenue into the system), and eventually
increase payroll tax rates. Most significantly, it would
give the government the power to invest as much as 40 percent
of the Social Security trust fund in common stocks instead of Treasury
bonds.
|
