Don’t fix it; it isn’t broken

There is no crisis in Social Security.

The system is not broke, will not be broke in 2018, nor will it be broke in 2042. Even Federal Reserve Chairman Alan Greenspan, who supports changes proposed by President Bush, refused last week to use the word “crisis” during testimony on Capitol Hill. Retirees, spouses and the disabled will be paid benefits 75 years into the future, the planning horizon for the system today.

The present beneficiary most likely to suffer over the next few decades is Uncle Sam. As Social Security’s trustees noted in their 2004 annual report, over a 20-year period the balance of money paid into the system will shift from a surplus equal to 7 percent of income tax revenue to a 6 percent draw on that revenue.

For an administration that has been in deficit denial for four years, that shift is not part of the nation’s fiscal outlook they want to talk about. Social Security has absorbed a lot of federal overspending over the years. In 2018, demands by retirees will begin to squeeze some of the water out of that sponge.

To a certain extent, all the talk of Social Security reform has the appearance of a vast exercise in shadow-boxing. Some bills that would make changes have been introduced in Congress, but none that codify the administration’s position. Instead of focusing on substance, the president has focused on hyperbole calculated to undermine confidence in what may be the federal government’s most durable achievement of the 20th century.

Social Security has been a success, maybe too much so. Founded in 1935 as safety net for the impoverished, the system has morphed into a source of perpetual income to everyone durable enough to reach age 65. There has never been a means test that would cut off retirees with incomes above a certain threshold, and no one seems to be even casually considering such a limit. The unfortunate corollary to its very success has been a sorry want of individual retirement savings despite incentives created for Individual Retirement Accounts, defined contribution plans like 401(k)s and a number of other tax-sheltered programs.

Bush’s proposal, so far as we know, would attempt to carve individual savings out of the savings now compelled by the government in the form of payroll deductions. Workers would be given the option of privatizing — a word seldom heard in this discussion — up to two-thirds of the amount deducted into a very limited selection of government-controlled investment options. At some point the money would be used to buy an annuity providing income for the rest of his or her life. In return, those workers would surrender a significant chunk of their guaranteed Social Security benefits.

If the yield on the funds invested through the government surpasses 3 percent over the inflation rate, the risk of shedding the Social Security blanket pays off.

But the federal government, deprived of the Social Security contributions, will have to turn to the bond market for a trillion dollars or more. Wall Street will demand a higher return on those bonds than Social Security has earned on the special Treasury securities the government issues the system every time reserves are tapped to cover budget deficits.

This administration’s unprecedented legacy of debt grows although, because the timetable for change does not begin until 2009, the problem conveniently becomes that of President Bush’s successor.

Can we afford to wait while the countdown to possible exhaustion of Social Security reserves ticks down to 2042, when retirees will begin to receive only the diminished benefits funded by the contributions of those still working? Or even 2018, when the federal government will have to start redeeming the securities held by Social Security?

Well, if the president is truly receptive to lifting the $90,000 cap on income subject to Social Security withholding, why not do so by way of an index? Increases would kick in when system trustees determine that the year when reserves will be exhausted has stopped receding into the future. That’s exactly what has happened consistently in recent years because contributions from worker incomes always exceed the very conservative number built into Social Security projections.

Just 10 years ago, the annual report of the Social Security trustees expected to deplete system reserves in 2030. That horizon has receded every year since, despite the economic slowdown after 2000. Their 2005 report is due next month. You can bet very safely the system’s doomsday will fall back to 2043, 2044, or further. The scenario the trustees use to get at that 2042 date assumes a meager economic growth rate of 1.8 percent. The U.S. economy expanded at the rate of 4.4 percent in 2004. And immigrants, whose contribution to the system are significant, numbered far more than the 500,000 plugged into trustee assumptions.

With an index, if that expiration date does stall at 2042 or, worse, starts to come closer, the income cap is lifted far enough to stop any erosion in the system’s financial condition.

Only 6 percent of Americans earn more than $90,000. They have been the major beneficiaries of tax cuts passed by this administration. If those earning $120,000 were fully taxed by Social Security, their contribution would increase by $1,860, as would the contribution by their employer. One bill already introduced by Sen. Lindsey Graham, R-S.C., would push the cap all the way to $200,000.

There is $845 billion in payroll not now subject to Social Security withholding. Taxing all of it would bring more than $1 trillion into the system. We probably will not have to go there, or anywhere near there. But indexing a higher cap to an unlikely deterioration in Social Security’s future would be simple, pain-free to all but a few Americans. It also would responsibly confront a “crisis” undetected by all but archconservatives whose objective is the destruction of Social Security, not its continuation as a financially sound island in a sea of their own fiscal irresponsibility — a sea that’s gradually swamping all the federal government’s other social endeavors.

Social Security has been extraordinarily effective and efficient. In addition to its other attributes, the system consumes just six-tenths of 1 percent of reserves in administrative expenses each year. Granted, the scale of the system has a lot to do with that, but how many other programs — public or private — are even close?

The real economic menace to the U.S. is Medicare. That’s where the administration’s focus should be.