May 28,2000

Healthy Americans Main Threat to Social Security

George W. Bush is brave, if nothing else, in proposing “partial privatization” of Social Security. He didn’t just touch the third rail of politics, he kissed it.

Clearly, the nation’s most popular entitlement plan is headed for bankruptcy under its present set up.

Not because of “baby boomers” heading into the homestretch. Their World War II demographic bulge is simply a bump in the road requiring a patch.

The long-term problem is one we eagerly sought – more people living to retirement age, and living longer thereafter, as result of better health care.

The Social Security Insurance plan was adopted in 1935 – nadir of the Great Depression -- to encourage early retirement and create jobs for younger workers. The average life span then was 57 years.

Today the average life span in the United States is 77 years according to the World Almanac. John Wilmoth of the University of California writes in the journal Science that the life span will be 85 years in 2050. That’s when Social Security will run out of money at its present taxing/benefits level.

Al Gore declares Bush’s “secret plan” would raise the Social Security retirement age to 67, increase the employee-employer payroll tax now 12.4 percent, and jeopardize pensions of present retirees.

Gore is either shamelessly frightening grandma -- or he doesn’t know much about Social Security and is frightening the rest of us with the possibility he might get elected.

The Social Security full-payment age already has been raised, secretly, to 67. The U.S. Office of Personnel Management Manual states: “The age at which unreduced benefits are payable will be increased gradually from age 65 to 67 over a 21-year period beginning with individuals who reach age 62 in the year 2000.”

Bush’s “plan” is a statement of principles he would recommend to a bi-partisan congressional committee. After all, Congress is the only branch of government that can make federal law:

* Benefits of present retirees, and those nearing retirement, must not be affected by any changes in Social Security.

* Workers should have the option of investing some of their payroll taxes – Sen. Daniel Patrick Moynihan recommends 2 percent -- in accounts similar to a 401-k or IRA.

* The current surplus in the Social Security trust fund should not be used for anything other than the retirement program.

* There should be no increase in payroll taxes that now fund the system.

The objective of Bush’s guidelines deserves emphasis inasmuch as critics distort it.

Investments envisioned by Bush are not stocks individually, but highly rated mutual funds, bonds, annuities and other financial securities. It is a disservice by Gore to characterize these choices as “stock market roulette.”

Corporations with stock programs for employees typically offer several mutuals from which to choose.

As an investment vehicle, Social Security is pitiful. It is hardly more than a medieval tontine to which many people contribute but only the last survivor collects. Until then, the tontine organizer gets to use the money for its own purposes.

Social Security depends upon deaths of most contributors before payoff. With privatization, that portion of payroll taxes so designated is personally owned and passed on fully to heirs in the event of an early death.

Privatization is not new. Chile went this route totally in 1981 with great success. Britain began privatization of social security 20 years ago, and about three-fourths of its workers have opted out of half the system.

Other countries implementing privatization are Argentina, Colombia, El Salvador, Peru, Mexico and Uruguay. The World Bank in 1994 advocated privatization to allay the worldwide crisis in social security systems.

Gore’s plan of shoring up Social Security with general revenues -- realized by paying down the national debt with apparent budget surpluses – has merit as far as it goes.

This would get us by the 2050 bottleneck but not solve the long-range problem -- a healthy, retired population draining the Social Security trust fund as now funded entirely by taxes. The tax rate would have to be 80 percent of all wages.

Like it or not, Social Security benefits will have to reflect an older society and shift the payoff burden – wholly or in part – to mandatory, private investments earning compound interest.

When Albert Einstein was asked what was the greatest invention of all time, he answered, “Compound interest.”

The process is the hope and salvation of a future, healthier, democratic society.

PARTING SHOTS

Clinton and Gore raised a record $26.5 million at their “Blue Jeans and Boots” rock concert for Washington, D.C. fat cats. Democrats obtain money from the rich, and votes from the poor, on the promise to protect one from the other.

* * *

Bush raised $21.3 million earlier at a Texas fund raiser. Money talks, and Bush listens. “Here I am, honey, come and get me.”

Lindsey Williams is a Sun-Herald columnist and can be reached at linwms@lindseywilliams.org.