Social Security, a Retirement Pot Stuffed with IOUs

March 19, 1995|By JOHN B. O'DONNELL

Washington. -- The recent debate over the balanced budget amendment produced some remarkable political obfuscation -- even for Washington.

"They are wanting really to loot this Social Security trust fund," Sen. Harry Reid, a Nevada Democrat, warned a couple of days before the vote, claiming that Republicans would use money that Americans put toward retirement to balance the budget. Other Democrats chimed in and "loot" was a word frequently used.

Lost in the rhetoric was that Democrats and Republicans have been "looting" the trust fund for years, using the money to help finance the everyday operations of government -- everything from making welfare payments to buying missiles.

An even more fundamental truth was also lost in the heat of the rhetoric. Even though it collects more money than it needs, and will do so for another 15 or 16 years, Social Security is headed for trouble, along with other government entitlement programs such as Medicare and Medicaid, as the post-World War II baby-boom generation begins to retire in 2008.

Private pension plans face the same problem, some analysts argue, because the ratio of producers to consumers will decline.

Consider some startling figures: In 2005, there will be nearly five workers for each retiree. Twenty years later, the ratio will be 3-to-1. And consider this: In the first decade of baby-boomer retirement, the number of working Americans will increase by about 3 percent, while the number of retirees will rise by one-third.

That means proportionately fewer workers to finance pension systems for retirees, at a time when medical and health advances are lengthening the lives of many Americans.

"The oldest baby boomers will be eligible for Social Security benefits in just 13 years," says Bruce D. Schobel, a former Social Security Administration official who is now vice president and actuary for New York Life Insurance Co. "They need to know what to expect from the program."

There is no unanimity on the seriousness of the problem, much less on the solutions that should be sought.

Social Security is "a chain letter . . . a Ponzi scheme" that ought to be scrapped and replaced with a private retirement system, former Delaware Gov. Pierre "Pete" S. du Pont IV said last year.

"We are facing . . . a gigantic truck wreck," warned Sen. Bob Graham, a Florida Democrat, during the balanced budget debate. He added, "There is going to be a generational clash in America. There could also be a clash between older Americans and better-off Americans."

Robert M. Ball, former Social Security commissioner, takes a more temperate view. "Alarmist rhetoric . . . about the need for major cutbacks in Social Security is completely unjustified."

He and Mr. Schobel argue that modest benefit reductions and tax increases would do the trick.

Most analysts say that changes need to be made. Suggestions include raising the retirement age (now scheduled to rise gradually from 65 to 67, beginning early in the next decade) to 70; reducing benefits, perhaps by limiting annual cost-of-living increases; making benefits contingent on other income so that wealthier retirees have their Social Security payments reduced; or raising taxes.

Mr. Ball says there is plenty of time to deal with the problem, but that public confidence would be bolstered by acting soon and delaying the effective date of the changes.

There's no doubt that Social Security faces a crisis in public confidence.

Polls show that a third or more of Americans don't believe that Social Security benefits will be there for them when they retire. Only 14 percent expect Social Security to maintain its current level of benefits, according to a recent Wall Street Journal/NBC News poll.

Young Americans have more faith in flying saucers than Social Security, according to a poll taken last year. Only 28 percent of the 18-34 age group think Social Security will exist when they retire, said the poll. But 46 percent believe in UFOs.

So, here's a 60-year-old program that has paid nearly $4 trillion in retirement and disability checks and has a $400 billion surplus that is expected to grow to $3 trillion in the next quarter-century.

Why a looming crisis?

The surplus and the trust fund itself are mirages, and that truth appears to be sinking in.

"The budgetary reality is that the payroll taxes are being used to finance the current operations of government and are masking the size of the on-budget deficit," the General Accounting Office reported five years ago.

"The economic reality is that the trust fund reserves . . . that are financing current consumption rather than productive investment are illusory. They will remain so until the rest of the government achieves approximate balance between revenues and outlays."

Here's the situation:

About 141 million Americans and their employers pay 12.4 percent of each worker's first $61,200 in annual earnings in Social Security taxes. Another 2.9 percent, split evenly, goes to Medicare.

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