Second of two columns
(Read Part 1)
SOCIAL SECURITY is racing toward a cliff.
The system is at war with itself. As the pool of seniors collecting benefits grows, the pool of workers paying for them is shrinking. The number of retirees living to extreme old age is much higher than it was 30 years ago, but the national birthrate is much lower. The seniors lobby, which snarlingly guards the Social Security status quo, has never been more powerful; the taxes seized from working people to sustain that status quo have never been so punitive.
The Social Security payroll tax is 15.3 percent. It kills jobs, depresses savings, suffocates investment -- and would have been unthinkable when the Social Security Act was passed in 1935. As recently as 1969, the maximum annual Social Security tax on any employee was $277. In 1993, it was $5,715. As of this year, thanks to President Clinton's tax-and-budget package, there is no longer any ceiling at all.
Yet it's not enough. Disaster looms. In 2016, as the Baby Boomers are retiring, Social Security will close out the year at a deficit, spending $7.2 billion more in benefits and overhead than it will collect in taxes. Five years later, the shortfall will have soared to $147 billion. By 2025, it will hit $478 billion. In 2029, the year today's 30-year-olds turn 65, Social Security will be bankrupt.
Like most pyramid schemes, Social Security is unsustainable. Americans born since World War II may not have done the arithmetic, but they sense the coming crisis. In a Luntz Research poll, fully 85 percent answered yes when asked if "the government has made financial promises to your generation that it will not be able to keep?"
Social Security has to be fixed. But as long as seniors keep yelling that it must never be touched and timid politicians are afraid to correct them, reforms will never happen.
Reforms like these, for instance:
1. Raise the retirement age. When 65 was picked as the "normal" retirement age for Social Security purposes, the average life expectancy in the United States was less than 60 years! Today it is 76. And that's for life expectancy at birth. For men at age 65, average life expectancy is now 15.4 (more) years; for women, 19.2. The golden years come a good deal later than they used to. Retirement should, too.
Actually, a slow rise in the retirement age is already planned. It is to start edging up in 2003, reaching 67 in 2027. Too small, too slow. Beginning in 2003, the retirement age should step up, two months per year, until it reaches 70. People born in 1938, who now figure on becoming eligible for full benefits at 65, nine years down the road, would have to work until they are 65 and two months. Those born in 1939 would work until 65 and four months. And so forth, ending with the cohort of workers born in 1967 -- now only 27 years old, decades away from retirement -- who would work until age 70.
So gentle a rise in the retirement age would hurt nobody. But it would be enough to eventually reduce the burden on Social Security by 20 percent -- a savings, in real (1995) dollars, of more than $60 billion annually.
2. Reduce cost-of-living adjustments. Republicans lambasted budget director Alice Rivlin for making this suggestion in her October memorandum. That was a cheap shot. She wasn't wrong.
Over the decades, Social Security benefits have exploded way beyond the rate of inflation. It is madness to perpetuate the disparity forever. If next year's COLA were limited to the excess of inflation over 2 percent, taxpayers would save $7 billion in the first year alone. By 2010, a "diet COLA" of inflation minus 2 percent would drive down Social Security's price tag by some $50 billion a year . . . and the system would no longer be on the edge of collapse.
These two reforms alone would sustain Social Security well beyond the point at which it is now scheduled to unravel. But their greatest benefit is that they would gradually make Social Security benefits worth less. And that is the key: If Social Security is to endure, Americans must stop thinking of it as the mainstay of their retirement.
Old-age benefits were never intended to replace personal savings or relieve individuals of the obligation to provide for themselves. They were meant to ensure only that no one too old to work would go hungry or lack shelter, nothing more. Yet an alarming 59 percent of retirees rely on Social Security for more than half their income.
For the new Congress, inducing Americans to take far more responsibility for their own retirement should be a priority. Restoration of tax-deductible IRAs, which both parties now support, is an easy and obvious change. Working men and women should be allowed to invest some of their payroll taxes in mutual funds in exchange for receiving lower Social Security benefits when they retire. And it is time to explore the possibility of privatizing Social Security altogether, as Chile has done with such spectacular and popular success.
For Social Security to be saved, it has to diminish in importance. The sooner that starts happening, the better off Americans -- old and young -- will be.
(Jeff Jacoby is a columnist for The Boston Globe.)