The re-engineering of Social Security

Nation's Business,  May, 1997  by James Worsham,  Robert T. Gray

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Previously considered untouchable, the nation's safety net for retirees is now the subject of intense efforts toward reform.

Since the first monthly Social Security check was delivered to Ida May Fuller of Ludlow, Vt., in January 1940, tens of millions of retired and disabled Americans have received Social Security checks--$4.8 trillion worth through 1996.

The $22.54 payment to Fuller marked the kickoff of what has become the most revered of all government programs, the heart of a safety net meant to help all Americans in their times of deepest need and greatest peril.

Consequently, it has become almost unthinkable for presidents or members of Congress to consider changing Social Security. It has become what some call "the third rail of American politics," a reference to the high-voltage rail on mass-transit systems: Touch it and you die.

Until now, that is.

This year, the debate over the future of Social Security is well under way--among experts and policy wonks if not the general public--and it has large implications.

"If we don't do something about Social Security's solvency--and soon--it will go bust," says Bruce MacLaury, who headed a Social Security reform study for the Committee for Economic Development (CED), a business research group with offices in New York City and Washington, D.C.

Robert Ball, a former commissioner of the Social Security Administration, offers a less-alarmist view: "The system is adequately funded up until around 2030; after that, current income [to the system] pays 75 percent of expenses. Ball was a member of the 1994-96 Advisory Council on Social Security, which recently put forth three competing reform plans. An advisory council is appointed by the secretary of health and human services every four years to review the status of Social Security and Medicare.

The debate over Social Security is often seen in even larger terms.

"This is the ultimate philosophical debate about government, probably the biggest one since the New Deal," says Michael Tanner, director of the Social Security privatization project at the libertarian Cato Institute in Washington. Tanner champions a nongovernmental replacement for Social Security.

At the opposite pole is Robert Shapiro, vice president of the Progressive Policy Institute, a centrist Washington think tank. "This is not about the role of government," he says. "This is about maintaining the achievements of the most successful social project of the last 50 years."

About 44 million Americans--retirees and their spouses, many disabled men and women regardless of age, widows and widowers, and dependent children of recipients--received $355 billion in Social Security benefits in 1996. That's up from 222,000 recipients the year that Fuller first collected, 2.9 million in 1950, 25 million in 1970, and 39 million in 1990.

Those payouts are projected to rise steadily each year, picking up steam as baby boomers--those born between 1946 and 1964--can begin collecting benefits in about 11 years, but critics say there are emerging danger signs for the program that must be heeded to avoid a fiscal and social disaster:

* Americans are healthier and are living longer, creating a bigger and longer demand on Social Security funds. In 1940, life expectancy at birth was 61.4 years for males and 65.7 years for females. Today it's 72.5 years for males, 79.3 years for females. By 2025, life expectancy is projected to increase to 75.6 years for males, 81.5 years for females.

* Fewer workers support each Social Security recipient, adding further fiscal strain. In 1045, 42 workers supported each recipient. Last year, only 3.3 workers supported each recipient, and the support level is expected to drop to 2.2 workers per recipient by 2025.

* Social Security will start to spend more than it takes in by about 2012. Baby boomers will be retiring by then, forcing the program to dip into the trust fund that's now accumulating. (The trust fund consists of U.S. government bonds, or IOUs from the Treasury; current payments are financed with current receipts from the Social Security payroll tax.) Unless changes are made in the system, the trust fund will be depleted by 2029, and payments will have to be supplemented with general revenues.

Few individuals who have studied the program dispute that some reform is necessary to make Social Security financially viable well into the next century. Some have suggested using techniques that have been used before to shore up Social Security, such as increasing the age of eligibility for retirement benefits, raising the tax rates on workers and/or employers, and slowing the growth of benefits.

This time, however, there's a new twist: It's called privatization, or investing at least some Social Security assets or a portion of an individual's earnings in the private financial markets. The concept is along the lines of individual retirement accounts and 401(k) plans.