Social Security: Insurance - or an investment plan?

A gripe of many younger Americans - especially those better off - is that Social Security is a crummy deal.

They argue that if they could invest at least a portion of their Social Security payroll taxes in the stock market, as proposed by Republican presidential candidate George W. Bush last week, they would enjoy more affluent retirement years.

That's certainly true if the economy behaves as well as it has in the past.

But, experts note, the Social Security System was designed to be less rewarding to higher-income people. It is a social insurance program. It aims to provide extra benefits for the less fortunate.

Some 30 percent of benefits go to the disabled and to survivors - mostly widows. The face value of that "insurance" - if Americans had to pay for it on private markets - is $10 trillion, says Henry Aaron, an economist at the Brookings Institution, a think tank in Washington.

Moreover, Social Security pension benefits are progressive. Social Security pensions replace 56 percent of low-income workers pre-retirement earnings; 42 percent of the average-wage workers retirement earnings, and just 28 percent for the well-off worker.

If an individual with average earnings of $29,000 a year retires early at 62, as many do, his or her Social Security pension would be $825 a month. That is 80 percent of the pension if the individual waited until 65.

"We are not talking about fat city," says Robert Greenstein, director of the Center on Budget and Policy Priorities, another Washington research group.

Many women, who are less likely to work a full career and have a private pension, get the special benefit of pensions based on the higher earnings of their husbands. Minus Social Security, the poverty rate for women over 65 would be an "astonishing" 52.9 percent, notes the National Council of Women's Organizations.

The great fear of many of those opposing even partial privatization of Social Security is that it would undermine both the political and economic basis of the present system.

Carving out individual accounts from Social Security, as Mr. Bush urges, "could create strong incentives for higher-income and younger workers to partially opt out of the ... system, leaving behind more vulnerable segments of the population and weakening the transfers toward lower-income workers that Social Security accomplishes," notes Peter Orszag, an economist at the University of California, Berkeley.

Oddly, just as a national debate on Social Security has been kicked off by Bush, a new study finds that the system is not progressive at all when both taxes and benefits are considered. The system doesn't transfer money from the rich to the poor.

In a paper for the National Bureau of Economic Research, Cambridge, Mass., three economists look at a 22-year-long record of the actual earnings of 1,778 individuals. They project their lifetime earnings, Social Security taxes paid, and expected benefits based on mortality tables. Because of several factors, the system benefits the prosperous more than the poor, they find.

One factor the three cite is that many people's earnings go up and down over their working lives. Taking account of this reduces progressivity. Another factor is the cap on the amount of earnings subject to Social Security payroll taxes - $76,200 this year. For the rich, Social Security taxes are minor.

The economists also account for the fact that the rich on average live longer than the poor - and so get benefits longer.

Further, they attempt to capture the value of those working at home - mostly housewives - who are not paid and not subject to payroll taxes. These individuals, by looking after children, cooking, cleaning the house, and so on, add to the well-being of the household, notes one of the economists, Don Fullerton, of the University of Texas, Austin.

Professor Fullerton concludes: "It is not worth going to so much trouble to preserve the present system for its progressivity if it is not progressive."

Liberal economists might reach a different conclusion: raise or eliminate the earnings cap on payroll taxes to make the system really progressive.

Payroll taxes are not to be sneezed at. They constitute a full 33 percent of federal revenues. Most low-income people pay more in Social Security taxes than income taxes.

Governor Bush offered few details of his Social Security plan last week. He did say that retirees or those near retirement would lose no benefits, and that he would not propose raising taxes. He spoke only of "principles."

This vagueness annoys the experts. "We need to go to specifics to know how [the plan] works, or if it works," Mr. Aaron says.

Aaron and other experts are forced to assume that Bush would take about 2 percentage points of the 12.4 percent payroll tax to put into individual accounts that could be invested in stocks - a popular idea in Republican circles. That would reduce the revenues available to Social Security itself. So hundreds of billions of non-Social Security revenues would have to be transferred to cover benefits.

Since the non-Social Security federal surplus would be mostly eaten up by Bush's proposed tax cuts, it doesn't add up, they conclude. An example of a politician making "grossly overblown promises that cannot be financed by available revenues," Aaron charges.

(c) Copyright 2000. The Christian Science Publishing Society