Knight-Ridder/Tribune Media Services, January 22, 1999
Imagine you are living in a house that you have bought and your mortgage has a variable interest rate. Say that interest rates go up, and you estimate that you would have to spend about one percent more of your annual income, for the next 30 years, to make the payments.
Would you keep the house, or sell it and move? Most people would keep the house, if they liked living in it, especially since their income can be expected to grow by more than one percent every year. (Actually, most people probably wouldn't even do these calculations. But let's assume that you are an economist or-- well, probably only economists would make these kinds of projections).
The situation of Social Security is analogous, for a 75-year period. To make all of Social Security's promised benefit payments for the next 75 years, it is estimated that we will need more money than the program is expected to collect. The difference is less than one percent of our national income, according to the estimates of the program's actuaries. These are very conservative estimates-- they are based on the assumption that the American economy of the 21st century will grow less than half as fast as it did in the past.
Given the accomplishments of the Social Security system-- for one thing, it has reduced poverty among the elderly from 35% of the population in 1959 to its present 11%-- most people would not be disturbed by the possibility that we might have to devote another one percent of our national income to the program. If the facts were presented honestly, it would be a no-brainer.
But we do not have an honest debate. In fact, the vast majority of Americans have been misled to believe that the program is in serious trouble, with many expecting that their benefits will not be there when they retire.
Enter the politicians. William Jefferson Clinton would very much like to have a legacy other than being the first President to be impeached in 130 years. The Republicans would also like to have something other than Clinton's impeachment to show for their hard work in the Congress. A common interest has emerged: Social Security will have to be "saved."
The President's proposal, outlined in his State of the Union address, would put $2.8 trillion from projected budget surpluses over the next 15 years into the Social Security Trust Fund. It would also have the Trustees invest about a quarter of this money in the stock market.
The first part of the proposal is fine: it would commit the government to using at least some of the general revenue to close the one percent gap, should it ever materialize.
It's the second part that is dangerous, but not because it has much chance of passing. Alan Greenspan has already announced his opposition to government investment in the stock market, and that should kill it. Nobody wants to mess with him-- he could start talking about "irrational exuberance" again, the stock market will tank, and they'll all be sorry anyone even thought of the idea.
The real danger right now is that the Republicans will respond by saying, "Okay, you want to put Social Security funds in the stock market-- fine. But let's put the funds in individual accounts." Since the President has also proposed individual accounts as an add-on-- to be funded with non-Social Security revenues-- we could end up with a political deal that diverts Social Security revenues into privatized accounts. This would put people's benefits at risk, add enormous waste, and seriously undermine the Social Security system.
Of course the whole idea of using the stock market to "save" Social Security is fundamentally flawed, since it is based on a grossly inflated notion of the rate of return that the market can provide. The Clinton administration is betting that stocks will provide the same rate of return as they did over the last 75 years. But this is not possible if, as they are assuming, the economy is going to grow at less than half of its former rate.
President Clinton's proposal avoided the worst "reforms" that have been put forth by almost all of the policy analysts and members of Congress that have proposed plans: namely, privatization and benefit cuts. This is proof of the enormous support that America's most successful anti-poverty program still enjoys, and the political dangers inherent in trying to weaken it.
But we are by no means out of the woods yet. And as long as the whole discussion is based on fundamentally false premises, which the public accepts because they so often go unchallenged, Social Security will remain vulnerable to political attacks-- often carried out under the guise of "saving" the program.