Social Security has been in the news quite a bit lately. It is an insurance program that protects all of us, rich or poor, from the many risks that can leave us without any income. Social Security protects us from disability, death of the family breadwinner, and market disruptions that can cause loss of retirement savings. It permits even those who work at meager wages to have an adequate income in old age. It is part of our social compact—our agreement to live together in a cooperative society made possible by a system of laws and governmental institutions that we jointly fund through our taxes.
Mr. Bush has been on a campaign to end Social Security as we know it. He wants the money to be invested in Wall Street, subject to the vicissitudes of the market. He claims this will welcome more Americans to his “ownership” society, where they will do better because they can keep “their” money. He’s tried to sell the idea by raising a fear that the U.S. might default on its debt to the Social Security Trust Fund.
Mr. Bush has his facts wrong. His privatization plan would change Social Security into Social Insecurity. The system is not bankrupt. Even using the pessimistic assumptions about the economy used by the Trust Fund, it will still pay more benefits to recipients in twenty years than it does now. Yes, current generations pay for the retirement incomes of older generations. But that’s a fair intergenerational transfer: from parents to children when the children are young and vulnerable, and from children to parents when the parents are elderly and vulnerable. It’s much fairer than the intergenerational transfer that Bush boasts about—bankrolling huge tax cuts for multimillionaires (now) with an enormous debt burden on today’s families, likely to be paid back by huge tax increases on our children and grandchildren (in the future).
My colleague Richard Kaplan has written an article examining the facts about the Social Security system and the trust fund. Here’s an abstract explaining the article, and a link to it on the SSRN network.
"The article begins by addressing the nature of the Social Security program's trust fund and explains how the federal government's ability to pay benefits is a function of political will more than the pecuniary intricacies of governmental trust fund accounting. The article then critically examines the components of the long-term financial situation of Social Security, including the use of economic growth rate assumption's that are extremely low by historical standards. It then analyzes several different possible responses, including reallocating governmental expenditures, changing the formula for calculating initial retirement benefits, increasing the cap on Social Security's payroll tax, and raising the retirement age, among others. Finally, the article notes that folks who would prefer to depend on their own individually managed retirement assets have a mechanism already available in the form of the Individual Retirement Account, a mechanism that is superior to President Bush's proposal for individual Social Security accounts in several dimensions."
Richard L. Kaplan, "The Security of Social Security Benefits and the President's Proposal" . 16 The Elder Law Report pp. 1-5, April 2005, http://ssrn.com/abstract=700323
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