A ticking bomb

December 02, 1997

Excerpt from a Los Angeles Times editorial that appeared yesterday. Opinion polls show that American workers are less and less confident that the Social Security system will be there for them when they retire. This skepticism about the viability of the most popular of all government programs rests on gloomy and credible projections.

In less than 15 years the Social Security surplus -- the cumulative excess of revenues over benefits paid to retirees -- will start to disappear. By 2030 it will be gone and payroll taxes will cover only about 75 percent of promised benefits. Everyone in Washington knows what's coming. What's lacking is a consensus about how best to head off insolvency.

Patchwork fixes

There is little public or political appeal in proposed patchwork fixes like gradually extending the retirement age, raising payroll taxes and cutting payments to the better-off. And such proposals fail to really address the basic demographic issue of an aging population and a work force that is getting smaller proportionate to the retirees it supports.

Currently, there are about 130 million workers and 43 million Social Security beneficiaries, a ratio of 3-to-1. By 2030, the ratio is expected to be only 2-to-1.

The problem isn't too few workers but too many retirees.

The most effective way to assure the system's solvency may well be through a radical reform that would phase in full or partial privatization. A functioning model exists in Chile, the first hemispheric nation to adopt a government-sponsored social security program (in 1924) and the first in the world (in 1981) to replace its public system with a privately funded and administered plan.

Under that plan, workers make mandatory contributions of 10 percent of their earnings to individual accounts. The money is invested in any of a number of closely regulated pension plans. These are essentially mutual funds with portfolios divided between domestic private-sector securities and government bonds.

The Chilean system, which of course is far more complex than can be described here, may be no more than a direction indicator for where the U.S. system could be going.

Pub Date: 12/02/97

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