It seems that no politician discusses Social Security these days without a call to “save” the program. Certainly, it is possible to see why the program needs saving. It is more than $20 trillion in debt and will be running a deficit in just 15 years.
But to focus on “saving” Social Security is to miss the larger point. It fails to address the serious shortcomings of the current system. The question should not be whether we can save Social Security, but whether we can provide the best possible retirement system for American workers.
Social Security is, in effect, both a retirement and an anti-poverty program, and a failure on both counts.
Social Security’s failure as an anti-poverty program is not surprising since its benefits are quite low. A worker earning minimum wage over his entire life would receive only $6,301 per year in Social Security benefits, well below the poverty level of $7,507. If this minimum-wage worker had been able to invest his payroll taxes, he would be receiving retirement benefits of $20,728 per year, nearly three times the poverty level.
Therefore, by forcing workers to invest in the current pay-as-you-go system, rather than in real capital assets, Social Security is actually contributing to poverty among the elderly.
Social Security also helps perpetuate poverty for future generations. Social Security benefits are not inheritable. A worker can pay Social Security taxes for 30 or 40 years, but if that worker dies without children under the age of 18 or a spouse over the age of 65, none of the money paid into the system is passed on to his heirs.
Because this forced annuitization applies to a larger portion of the wealth of low-income workers than high-income workers, it turns inheritance into a “disequalizing force,” leading to greater inequality of wealth in America. Harvard University’s Martin Feldstein suggests that the concentration of wealth in the U.S. would be reduced by as much as half if low-income workers were able to substitute real wealth for Social Security wealth.
Nor does Social Security succeed as a retirement program.
Social Security’s rate of return has been steadily declining since the program’s inception and has now reached a point where it is far lower than the return from private capital investment.
According to the Social Security Administration, workers born after 1973 will receive rates of return ranging from 3.7% for a low-wage, single-income couple to just 0.4% for a high-wage-earning single male. The overall rate of return for all workers born in a given year was estimated at slightly below 3% for those born in 1940, 2% for those born in 1960, and below 1% for those who will be born in the next century. Numerous private studies predict future rates of return for an average wage earner ranging from 2% to a negative 3%.
To make matters worse, these studies generally assume that Social Security will be able to pay all its promised benefits without increasing payroll taxes. However, given Social Security is facing a long-term financial shortfall, the system’s own Board of Trustees projects that either taxes will have to be raised by at least 50% or benefits reduced by 25%. In many cases the rate of return will actually be negative.
By comparison, the average rate of return to the stock market since 1926 has been 7.7%. Indeed, there has never been a 20-year period in which the market performed worse than projected future returns from Social Security. Even corporate bonds have consistently outperformed Social Security. Discounting the period 1941-51, when government price controls artificially reduced the return, corporate bonds have paid an average real annual return of more than 4%.
Social Security also contains very serious inequities.
The most obvious unfairness is intergenerational. Those retirees currently receiving benefits paid a relatively low payroll tax over their working lifetimes and receive a fairly high rate of return. That high return is subsidized by much higher payroll taxes on today’s young workers who, in turn, can expect much lower future benefits.
The program’s intragenerational inequities are less visible but just as unfair. People with identical earnings histories will receive different levels of benefits depending on how long they live. Individuals who live to be 100 receive far more in benefits than individuals who die at 66. Therefore, those groups in our society with shorter life expectancies, such as African-Americans, are put at a severe disadvantage.
It seems amazing that this disparate impact, which would not be tolerated in any other government program, is so easily accepted within the current Social Security system.
The current program is equally unfair to women who work outside the home.
Under the current system, a woman automatically is entitled to 50% of her husband’s benefits, whether or not she has worked outside the home or paid Social security taxes. However, if a woman is able to claim benefits both as a spouse and in her own right, she may receive only the larger of the two. Because many women work only part-time, take years away from work to raise children, or earn lower wages than their husbands, 50% of the husband’s allocation is frequently larger than the benefits she would be entitled to as a result of her own earnings. She will therefore receive no additional benefits even though she may have paid thousands of dollars in payroll taxes. Indeed, she would receive exactly the same benefits as she would had she never worked a day outside the home.
Finally, it should be noted that the current Social Security system makes American seniors dependent on government and the political process for their retirement.
However, it has long been settled law that there is no legal right to Social Security. In two important cases, the U.S. Supreme Court has ruled that Social Security taxes convey no property or contractual rights to Social Security benefits.
As a result, a worker’s retirement security is entirely dependent on decisions by a president and Congress. Benefits may be reduced or even eliminated at any time, and are not directly related to Social Security taxes paid into the system.
The current Social Security system is a failure by almost every criterion. Instead of saving it, we should begin the transition to a new and better retirement system, based on individually owned, privately invested accounts.
A privatized Social Security system would lift more seniors out of poverty, while allowing them to accumulate real wealth that could be passed down to future generations as an inheritance. Because it would provide a far higher rate of return, it would yield much higher retirement benefits. This would particularly benefit the poor and minorities. Finally, because workers would own their retirement benefits, they would no longer be dependent on politicians for their retirement incomes.
When it comes to Social Security, policy makers should consider the question: Is it more important to save a system or to provide a better retirement to American seniors?
Tanner is director of the Cato Institute Project on Social Security Privatization in Washington, D.C. This article is adapted from a longer paper, “‘Saving’ Social Security Is Not Enough,” at www.cato.org.
