On Greenspan and Social Security

February 26, 2004

"Federal Reserve Chairman Alan Greenspan said what about Social Security!" I shouted to Vinny the Number Cruncher, my gray-haired accountant.

"You heard him, kid. He says the government has promised way more retirement benefits than it can cover. He recommends cuts for future generations instead of taxes. That will affect people like you."

"But I thought Social Security was an insurance program, not a typical government program."

"Yeah, kid, when FDR signed it into law in 1936, it was considered an insurance program. People contributed money to the program through income taxes. When they retired, they drew money out."

"Then how can the government arbitrarily cut my benefits?"

"The Supreme Court ruled long ago that policy makers could change Social Security's benefit formula to reflect shifting conditions. They can cut benefits anytime, and they've done so many times over the years."

"But that's not fair, Vinny. I'm paying up to $11,000.00 into that program every year."

"Sorry, kid, but 77 million baby boomers will begin retiring in 2008. The ratio between people paying into the program and people drawing out will change drastically. In 1950, there were 16 workers paying in for every person drawing out. Today there are three. By 2020, there will be two!"

"But Social Security has been running surpluses for years. Surely the government has a huge pile of dough in the bank that they can draw from when I retire."

"You slay me, kid. Look, as the Social Security surplus rolls in, the government doesn't bank it. They spend it. They purchase special treasury bonds, then use the dough to fund OTHER government programs."

"The government borrows from itself?"

"No, kid, the government borrows from YOU. Look, in 2018, the Social Security surplus will cease and huge deficits will begin. To cover the shortfall, the government will need to cash in the bonds. Guess where they'll get the money to pay off the bonds?"

"The taxpayer?"

"You catch on quick, kid. Greenspan says it's a bad idea to raise Social Security taxes, but that's what our Congress will likely do. After all, they've raised Social Security taxes 40 times since 1936. And they'll have to raise them another 50% to cover the coming shortfall."

"Or cut benefits, Vinny?"

"AND cut benefits, kid. All they got to do is push up the age of eligibility. You're 41 now, so you can't begin collecting until you're 67. But younger generations are really going to get hit. Since most of them don't vote, who knows how far off Congress might push up their eligibility."

"There's got to be a better way."

"Funny you mention that, kid. The Bush people are pushing for privatization. Here's how it would work. Instead of sending all 12.4% of your Social Security income taxes to fund the program, you'd be allowed to invest a portion of that dough in your own private account."

"What's the benefit of that?"

"By doing so, you would agree to receive reduced Social Security payments in the future. That would really help to reduce the government's long-term liability. The other benefit is that you'd be able to choose higher-performing investments, such as the stock market."

"But isn't that risky?"

"Kid, since 1802, stocks have earned an average of 7% a year - way better than the measly 2% return Social Security is paying out now."

"Then why is Greenspan the only one talking about the Social Security problem?"

"Come on, kid, you know most politicians are cowards. Who can blame them. As soon as Republicans talk about privatization, Democrats spread mistruths to scare the bejesus out of the elderly. Democrats have been making hay with this issue for years."

"So what should we do?"

"Well, kid, if I was in my 20's, I'd write my congressman and push for privatization. But for you, I recommend a more realistic strategy."

"What's that, Vinny?"

"Find the two young workers who will pay your Social Security benefits and make sure they're on your Christmas list."

Tom Purcell

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