Fix Social (in)Security

The federal government’s recent dip into the Social Security surplus has refueled the anxiety many feel over their financial future. The following is an excerpt from remarks delivered by Wharton Professor Olivia Mitchell, a member of President Bush’s Commission to Strengthen Social Security, to her fellow commissioners July 19.

Mitchell is International Foundation of Employee Benefit Plans Professor of Insurance and Risk Management.

The U.S. Social Security system is not in danger of running out of money today. Nevertheless, our Old-Age and Survivors Insurance (OASI) system faces financial shortfalls that advance action can do much to alleviate. Annual Social Security payroll tax revenues will soon be inadequate to pay currently promised benefits. Though the Social Security Administration can claim the federal government’s IOUs to pay money borrowed from it, known as Trust Fund assets, redeeming these IOUs requires financing from somewhere. And as we know, when the government gets financing from “somewhere,” this means us and our children.

Give workers control

Soon, new tax revenue will have to be devoted to the program, government expenditures will have to be cut, or new debt must be issued.

Experience shows that giving the surplus to the government results in more government spending, and conversely, I believe, giving control to workers will result in less political risk that the government will spend the Trust Fund assets.

Reforming the system now is needed to enhance economic security.

Some claim that today’s system is progressive because it provides a higher percentage benefit to low as compared to high earners. There are a couple of problems with this conclusion. One is that it focuses only on benefits while ignoring taxes. About one-third of older married women today expect no extra benefit even when they work and contribute to the system late in life. Further, future increases in women’s market attachment will not improve many women’s benefits, despite their paying more Social Security taxes. Additionally, divorce rates peak after about seven years of marriage, but under current rules benefits are not available to former wives unless they remain married 10 years.

Poverty remains

The lack of a minimum poverty guarantee in our OASI program also does nothing to ensure that people are protected from poverty in old age. For many, the net benefit from Social Security due to additional work is and will remain negative after taking account of the Social Security payroll tax these workers pay while employed.

OASI rules today leave many people uncovered, ineligible, paying but getting little or nothing at the margin, and sometimes poor.

I believe we should do better, and ownership of a personal saving account can play a role in this improvement. A personal account can give workers a stake in some additional benefit if they contribute more, which many people today do not perceive.

The current OASI system also requires people to pay taxes over a lifetime, but the asset cannot be passed on if people die young. According to a recent study, a 22-year-old man today has one chance in five of dying before his normal retirement age. He would receive no old-age benefit despite a lifetime of contributions. And some people are even more vulnerable. For example, African-American men have one chance in three of dying young. If they are uneducated, this risk increases to 41 percent, or two out of five. An individual account program would permit people to leave some of their contributions and interest as a bequest to their heirs.

Some propose raising taxes to keep the system going, or boosting the return credited to Social Security Trust Fund, which boils down to the same thing, raising taxes. Members of the President’s Social Security commission believe that increasing taxes to keep a current troubled system in place will not solve the problem. They also believe that individual accounts can bring about real increases in retirement saving while reducing political risk and enabling people to diversify their investments.

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Originally published on September 13, 2001