Social Security sounder than you might think
Economic Scene: The latest report from the trustees of the system show improvement in its finances, despite some grim coverage.
The 1 in 4 American families who receive some form of Social Security benefits should be cheered by the latest annual report of the system's trustees.
That report, issued March 25, shows "a really significant improvement" in the finances of the system, says Andrew Biggs, who helped draft the report while serving as deputy commissioner of the Social Security Administration (SSA).
That's not the way some in the press saw this report. One headline used the word "grim." That description would be true in regard to the report of the Medicare trust fund that pays hospital benefits. While the four trustees signing the report foresaw "enormous challenges" for both programs, they expected Medicare's financial difficulties to come sooner and be "much more severe" than any problems tied to Social Security.
What perhaps caused some confusion among the public is that the report calculated that benefits paid would exceed revenues from taxes on payrolls in 2017, same as last year's report. That prospect is based on the fact that the nation's 80 million baby boomers have now begun to retire.
But the reserves of special Treasury bonds in the system's trust fund will not be exhausted until 2041, as was also stated last year. Yet any fix for the Social Security system should be financially easier, the report indicates.
The system's actuaries now project that an increase in immigrants and their children mean that the number of tax-paying workers in relation to retirees will be higher after 2041 than previously estimated. More immigrants paying taxes means that the actuarial deficit over the next 75 years has dropped from $4.7 trillion in last year's report to $4.3 trillion in the 2008 report.
Those numbers may seem huge, but they are "manageable," says Paul Van de Water, an economist with the National Academy of Social Insurance (NASI) in Washington. "Social Security is structurally sound and does not require drastic changes."
It would take a permanent boost in the payroll tax from 12.4 percent of wages to 14.1 percent (half paid by the employee, half by the employer) to keep the program fully solvent for the next 75 years. Or benefits could be cut a little.
But the important message here is that the system is not bankrupt. Tax revenues will still be rolling in after 2041. If Congress fails to pass remedial legislation and the long-term forecasts of the SSA are correct, the system will still have enough revenue to pay 78 percent of the benefits promised in 2041.
Because of rising productivity over the decades, retirees in 2041 would reap greater Social Security benefits in real terms than the average $1,081 per month that today's retirees receive.
But some analysts hold that the most relevant number for future retirees is the replacement rate – what typical workers would receive in Social Security benefits relative to what they had earned before retiring. That rate would drop from 36 percent today to 28 percent in 2041.
Alicia Munnell, director of Boston College's Center for Retirement Research, finds that drop troubling, especially since many corporations are replacing standard pension plans that carry fixed benefits with 401(k) plans, in which benefits often hang on trends in the stock market or other financial markets.
As of 2004, the typical 401(k) or Individual Retirement Account for a male, head of household age 55 to 64, had only $60,000 in assets. That sum would do little to improve the living standard of most Americans over many years of retirement.
In any case, the analysts interviewed agree that current declines in stock and home prices have enhanced the perceived value of Social Security. Only half of American workers are covered by pensions of any kind outside of Social Security.
Moreover, the recent stock market and real estate woes have further diminished any possibility for privatization of Social Security. The Bush administration proposed partial privatization of Social Security (or private accounts), but public reaction and the last federal congressional election decidedly shot down that plan.
Even Mr. Biggs, who several years back worked for a leading advocate of privatization, the Cato Institute, concedes that the only feasible political possibility at present would be government-encouraged private accounts on top of the existing Social Security system, not carved out of it. That, plus a cut in benefits, might be a "reasonable compromise" between Republicans and Democrats, suggests Biggs, now at the American Enterprise Institute, a conservative think tank in Washington.
Republican presidential candidate Sen. John McCain of Arizona ducks the Social Security privatization issue by proposing a commission led by former Federal Reserve Commission Chairman Alan Greenspan. His somewhat ambiguous words suggest he might support an add-on system of private accounts.
The Democratic candidates oppose privatization. But no action on Social Security is likely until after the November election.