Privatize Social Security at everyone's risk

Friday, October 3, 2008 | 10:00 a.m. CDT; updated 11:21 a.m. CDT, Friday, October 3, 2008

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The collapse of major financial institutions should remind the American people of how much is at stake in the debate over Social Security. In 2005, President George W. Bush proposed permitting younger workers to divert payments away from Social Security accounts and into accounts tied to the stock market. This year's Republican Convention platform continues to advocate that goal, and just weeks ago, the party's presidential candidate, Sen. John McCain, again publicly embraced the concept.

Imagine if a person were retiring today and his or her Social Security contributions were tied up in today's volatile financial markets. Moreover, subtracting employee contributions from the Social Security system inevitably would weaken the system, not strengthen it, and permitting the diversion of employers' matching contributions would double the damage.

The reduced funding would only add to the pressure to cut benefits, to eliminate or shrink living-cost adjustments and to raise the retirement age.

From its inception, the benefits earned by Social Security recipients have been financed primarily by mandatory contributions by current workers and their employers. It is a simple idea: under our long-standing intergenerational compact, today's working people fund the benefits of the generation of their parents, aunts and uncles.

Tomorrow's workers will pay for the benefits of today's workers when they retire. The concept mirrors the age-old practice of adult children helping their parents. Contrary to conventional wisdom, the changing proportion of older people to younger people in America is not the menace to future benefits that is so often claimed. These demographic shifts present challenges, of course, but the projected financing problem is moderate.

Every year, the Social Security Trustees issue a report comparing projected program income and benefits for the subsequent 75 years. These are not predictions; they are best-guess estimates based on assumptions that are always subject to revision based on a host of variables. Indeed, over the last several years, the trustees have reported that actual results were better than earlier projected. The most recent report, issued earlier this year, projected a moderate shortfall over the next 75 years of 1.7 percent of payroll, a very manageable margin.

Instead of weakening Social Security funding by privatization, we should strengthen the economy by improving funding for schools and training at all ages and by promoting capital investment. Education and improved technology leads to an expanding economy, which creates more for all generations to share. With more people working at better-paying jobs, the funding situation of Social Security would improve, as would benefits down the road.

There also are strong policy arguments for changing the cap on earnings that are subject to the Social Security payroll tax. In 1977, Congress set the cap at a level that would cover 90 percent of all earnings nationwide. By indexing the cap to the growth of average wages, Congress meant to keep the cap in line with such growth.

The cap has not done that job, though, because over the past few decades the wages of the highest paid workers have grown much faster than the average of all wages. As a result, the cap now covers only 84 percent of total wages. The slippage from 90 percent to 84 percent in coverage costs Social Security tens of billions of dollars every year. Getting that percentage back up to 90 could be done by focusing on only the most generously-paid workers, leaving contributions from the vast majority of workers unchanged. Some of the proposals advanced by the Democrats and their presidential candidate, Sen. Barack Obama, address the issue this way.

Privatization — whether we should call it that or not — would substitute gambling in the stock market for the guaranteed benefits of Social Security, the mainstay income source of American families when disability strikes, when a working parent dies or at retirement. They need reliable income and so does the economy. In this period of economic insecurity, there is no issue more deserving of clear, direct discussion and debate.

Nancy J. Altman is the author of "The Battle for Social Security: From FDR's Vision to Bush's Gamble" and a former legislative assistant to former Missouri Republican Sen. John Danforth. Merton C. Bernstein, co-author of "Social Security: The System that Works," is the Coles Professor of Law Emeritus at the Washington University School of Law. Eric Kingson is the author of "Social Security and Medicare: A Policy Primer" and a professor of social work and public administration at Syracuse University. All three served on the staffs of Republican and Democratic appointees to the National Commission on Social Security Reform (1982-1983). This column was first published by the St. Louis Post-Dispatch.

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