Opinion pieces and speeches by EPI staff and associates.
Commission’s Failure Spells Progress for Social Security Reform
The best test of any idea usually comes when we try to put it into practice. The place where the theoretical rubber meets the painfully concrete road is often littered with the stripped-off tread of big ideas whose traction failed at the moment of truth.
A case in point is the recent, ignominious end of the idea that we can improve on retirees’ Social Security benefits by rerouting some of their retirement money into private accounts. This idea was touted not only as a way to save Social Security from the financial ruin that some have predicted, but also as a route to more personal wealth to burnish retirees’ golden years.
After seven months of deliberation, the presidential commission that was created to figure out how to make this idea work has thrown up its hands and closed up shop. Instead of a roadmap on how to proceed they produced three “options.” Instead of a plan to avert financial shortfall, they offered $3 trillion more in costs over the next twenty years. Instead of a formula for paying the bills, they left it up to Congress to figure out how to close the funding gap.
The commission didn’t fail for lack of trying. Its membership was hand-picked expressly to make the case for privatization and its report shows that the commissioners strove mightily to make the idea seem workable and attractive, even when the facts didn’t necessarily support such a characterization. In some instances, the commission’s report omits or glosses over key facts; in others, its presentation seems deliberately misleading.
For example, when the commission could not solve the long-term social security financing problem, it fell back on some accounting gimmicks to seem to cover the shortfall, mainly through very long term government bonds that will come due after 75 years.
To blunt anticipated objections to their three options, the commission constructed hypotheticals that rest on some very shaky assumptions. For example, one option would seem to require individuals to work for 45 years in order to reach the hypothetical account balances they lay out.
The commission also assumes a much higher rate of return on private investments than is likely to materialize, especially after factoring in transition and insurance costs and the marked slowdown in economic growth that is projected for the next 75 years. The commission assumes that equity holdlings will return 6.5 percent, when the actual rate is much more likely to be around 4 percent instead.
In defending of one of its options, the commission actually tries to portray a decrease as an increase. Instead of comparing future benefits under semi-privatization to what a worker would have gotten from Social Security, the commission compares them to today’s benefits, ignoring the fact that living standards and Social Security payments are rising.
Despite the commission’s best efforts to find a way to make privatization work, they couldn’t do it. The best they could come up with is a series of options that would generally force us to work longer or give us less to live on in retirement or both.
Does that mean that the $700,000 that was spent on the commission’s work was wasted? Not at all. The commission couldn’t show a way that privatization can save Social Security, but it did show something just as important: that private accounts are not the answer. It’s time we closed that door and looked elsewhere for the solution.
There are plenty of other unexplored and promising options out there. The most obvious solution, and one that won some support from some of the commissioners even though it fell outside their mandate, is to lift or remove the arbitrary cap on income that is subject to the Social Security tax.
As it now stands, wages over $80,400 per year – that’s about 14 percent of all wages – are exempted from the payroll tax. That one simple fix, which would affect only the highest-earning seven percent, would solve most, if not all, of our shortfall problem until at least 2075.
These and other practical ideas deserve much more discussion. Now that the commission’s pursuit of the golden grail of private accounts has come up empty, it’s time to get back to the drawing board. We may find the solution in the most obvious place of all — in a relatively minor modification to Social Security as it now exists.
Christian Weller is an economist at the Economic Policy Institute.
[ POSTED TO VIEWPOINTS ON JANUARY 4, 2002 ]