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Myths about Social Security

Observer Viewpoint | Thursday, February 10, 2005

For months, an expert on the Social Security Trust Fund has told anyone who would listen that Medicare costs are more of a national “crisis” than the president’s claim of Social Security. This expert begins with Ronald Reagan, the last president to keep Social Security solvent by raising taxes. Reagan sought enough excessive taxation to create a huge trust fund surplus that in the future (now) would supplement the tremendous drain caused by massive “Baby Boomer” retirements. Reagan had no eye on his personal legacy, but on doing what was best for the nation at the time.The expert recalls that during last year’s campaign, before Congress approved the new Medicare package, the president promised a cost-effective program. Yet rumors ran rampant that Republican appointees threatened to fire any career federal employee who failed to publicly support the administration’s claim that Medicare prescription costs totaled about $400 billion over a 10-year span from 2004 to 2013.Furthermore, the expert indignantly notes that after the embargo on civil servants ended when President George W. Bush signed the provision into law, Congress soon learned that the figure immediately ballooned to a more realistic cost of $534 billion. On Wednesday, updated long-term projected costs for years 2006 to 2015, adding just two new years to the projection, increased estimates from $534 billion to $723 billion for the newly-initiated prescription drug coverage. At last, a sticker-shocked Washington officially heard that expert loud and clear.Medicare costs will begin to increase a minimum of $100 billion per year, in each year beyond 2013. That is a fiscal crisis worth noting. It is the monetary equivalent of yearly American expenditures for one and a quarter Iraqi war efforts. A fiscal fiasco will lay upon our doorstep a full thirty years before the current Social Security structure even begins to approach shortfalls after 2042.Why do so many Americans accept the president’s rhetoric? First, most Americans wrongly think that Social Security is either an investment pension vehicle (Republican rhetoric) or a pension insurance vehicle (Democratic rhetoric). Social Security was a redistribution from those with jobs to those without or a collective cooperative effort to provide a minimum safety net during the Great Depression. At its inception, for every retiree collecting Social Security, sixteen workers shared the burden. It was not designed to gather great investment returns. Nor was it designed to replace private pensions.Secondly, many younger Americans believe that Social Security will not survive by the time they retire. They know that today, three and a half workers support each retiree, but that number will drop to two workers for each retiree in a decade. Yet, young workers do not understand that at the current rate, with no changes at all, Social Security would not shortchange them. If nothing was done for nearly fifty years, it only falls one-third short of necessary funding levels around 2050. Easy, rather simple fixes have already been proposed to keep Social Security solvent. The largest senior citizens’ organization (AARP) advocates restoring the total wages taxed for Social Security to 90 percent of nationwide earnings. A gradual, decade-long phased increase would move the cap for each wage earner of $90,000 in 2005 to a $140,000 cap. Others advocate eliminating caps and creating a larger initial exemption (floor) for those less able to afford taxation while taxing 100 percent of income above that floor. They fall back on the initial spirit of Social Security. That is, they maintain that those with higher incomes who can most afford the tax share should bear a larger portion of the cooperative burden. They also guarantee solvency well beyond this century.Thirdly, Bush’s focus-group driven phrases seem to make sense while he blends issues to blur the truth. For example, Bush prefers to call the accounts “personal” to appeal to greed and convey ownership rather than “private” which conjures a feeling of exclusion for others. To support his contention that “you” can do better, he may say, “You only get two percent return on current Social Security funds now when you can get more by investing in the stock market.”Nations like Chile, Argentina, Canada and Great Britain have attempted various personal accounts, but all have suffered losses. Chile first converted its equivalent government system entirely to private accounts in 1981. Today, their average payment is $125 per month per person. Argentina originally linked its similar system to the American dollar but converted back to its native currency during a recession and suffered huge losses. In an effort to garner a greater return for all retirees, Canada elected to manage and invest its entire fund without converting to individual personal accounts. It lost tens of millions as well. Britain’s 25-year quest for greater return on investment collapsed when the costs of administering the personal accounts reduced their fund by almost 30 percent. Today, while the annual average U.S. Social Security payment is $11,000, the British equivalent is $8,000.Finally, nobody knows the effect of Bush’s proposal if billions of new dollars surge into the U.S. stock market. Remarkably, Wall Street has remained silent on the Bush proposal. Maybe they have no way of calculating how to balance the many Baby Boomers who will withdraw billions from the market as they retire, thus tilting the market in the opposite direction. Maybe they realize that Medicare is the great white elephant looming beyond the horizon. Or maybe they see that unlike Reagan, this president merely keeps his eye on ideology and legacy.

Gary Caruso, Notre Dame ’73, served as a legislative and public affairs director in President Clinton’s administration. His column appears every other Friday. He can be contacted at [email protected] views expressed in this column are those of the author and not necessarily those of The Observer.