Top-Name Economists Put Social Security in Perspective
April 27, 2005
President Bush has been touring the nation in an attempt to promote the Administration’s plan to privatize Social Security. But his road show hasn’t helped generate public support for his proposal. Public opinion polls continue to show dwindling approval of Bush’s handling of Social Security. The majority of people do not believe it is in the state of financial crisis that the Bush Administration claims. While people do have some concerns about whether Social Security will be there for them when they retire, the majority feel the risks of private accounts are too great.
Before Bush visited students at the University of Notre Dame last month, economics professors at the university, Marty Wolfson and Teresa Ghilarducci, shed some light on the topic in an interview with the local South Bend Tribune. Wolfson began by reiterating what other experts have been saying—that Social Security is not in a crisis. Instead, he says the problem has usually been defined as the possibility that at some point, Social Security will not be able to pay full benefits promised to retirees.
“The Social Security Administration forecasts that it will be able to pay full benefits to retirees until 2042. After that date, it will be able to pay about 73 percent of promised benefits,” said Wolfson. “This reduced benefit will still be higher, in terms of real goods and services it can buy, than current benefits. It may be reasonable to call this a potential problem, but it is hardly a crisis requiring immediate, drastic action.”
Part of the misinformation of a supposed crisis—circulated by privatization supporters—is the belief that the Social Security trust fund is just a filing cabinet of IOUs. The Trust Fund was set up as a reserve of excess money taken in from payroll taxes. The excess is borrowed by the U.S. Treasury, which in turn issues special-issue Treasury bonds to Social Security. These bonds in the trust fund also collect interest, and Wolfson points out that the government has always said they are the “safest investment in the world.”
“These Treasury bonds contain the same legal obligation to repay Social Security as do the Treasury bonds held by Wall Street firms and Japanese investors. If Social Security bonds are no good, then we had better inform Wall Street and the Japanese that they are holding worthless IOUs,” said Wolfson.
Rather than wondering if the Social Security Trust Fund will ever be repaid with IOUs, Wolfson says a better question is to ask how the Treasury will find the money to repay its bonds. And this doesn’t just apply to Social Security, but to all the bonds held by investors, and all the policies that have led to the huge federal debt—including Bush’s tax cuts.
“Assets in the Social Security Trust Fund represent a legal obligation to transfer resources to retirees. They do not provide the resources directly,” added Wolfson.
Knowing this, it seems that President Bush’s proposal to create private accounts, which allows workers 55 and younger to invest some of their payroll tax in the stock market, is just a way of forgoing the burden of paying back the Social Security Trust Fund in the future. Whether that may or may not be the case, Ghilarducci warns that “private accounts would make Social Security’s problem much worse,” and Wolfson agrees.
“If the problem is that retirees won’t be able to receive their full promised benefits, then private accounts will do nothing to address this problem. In fact, it will make it worse,” said Wolfson. “Workers who choose to divert their payroll taxes to private accounts will see their Social Security benefits reduced an amount even greater than what they contributed to the private accounts. The hope of private accounts is that retirees will more than make up for their reduced Social Security benefits with greater returns in the stock market.” The question most people seem to be asking is, why should they be left to hoping private accounts will accumulate enough money for retirement when Social Security benefits are guaranteed?
The fact is that Social Security has been a guaranteed benefit for retirees, and for workers and their families in case of disability or death for almost 75 years. Hoping to bank on good investments with the ups and downs of the stock market is only one risk of having private accounts. As an economist, Ghilarducci can name many more risks not often mentioned by privatization proponents. They include: “Outliving your money, inflation during your retirement eroding the buying power of your income, the financial collapse or slowdown of bond and stock markets, bad advice from financial advisers, high fees charged to low-income savers, and having survivors and dependents when you are too old or too disabled to work.”
Recent polls illustrate that the more people learn about Bush’s plan to privatize Social Security, the more they oppose it. Bush is attempting to raise public anxiety by declaring Social Security is in a crisis. But privatization would only make retirement security less secure.
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