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Pensions
Social Security: Are the Forecasts of Doom and Gloom Fact or Fiction?
By Brian Beck
President & CFO, Wealth Management Group of North America, LLC
Will Social Security eventually go broke and be unable to pay any benefits, or is this a big myth?
That was the focus of a seminar I recently attended at The Kaye Playhouse at Hunter College, as
part of The New York Times Speakers Series.
The panel setting was moderated by Robin Toner, domestic correspondent of The New York Times,
and featured Paul Krugman, an Op-Ed Columnist of The New York Times and professor of
Economics and International Affairs at Princeton University, John Rother, director of Policy and
Strategy at A.A.R.P., and Michael Tanner, director of Health and Welfare Studies at the Cato
Institute in Washington, D.C.
Before addressing what was discussed, I think it is important to understand a brief history of
Social Security. On August 14, 1935, President Franklin D. Roosevelt signed into law the Social
Security Act. The new Act created a social insurance program designed to pay retired workers
age 65 or older a continuing income. Monthly benefits began in January 1940, as Ida May Fuller
of Ludlow, VT, received the first monthly check ever of $22.54. However, Social Security
retirement benefits were so low in their initial years that only about 50% of America’s workers
were covered, due to the fact that the average welfare benefits received under the old-age
assistance program were higher. To many, the real start of Social Security occurred in 1950 when
Congress added COLA’s to Social Security retirement benefits and millions more Americans
started to collect Social Security versus welfare.
Over the next 50 years, Congress expanded Social Security from a system that was to just provide
retirement income to workers into one that also provided income benefits to spouses, children,
and the disabled, and health benefits to the poor (Medicaid), and everyone over the age of 65
(Medicare).
Now, I would like to discuss what was said at the seminar. It started with a discussion of
President Bush’s recent failed attempt to “fix” Social Security by allowing younger workers to
divert their Social Security contributions into a “separate account,” and then allowing them to
manage it. The entire panel was unanimous in saying that the President’s plan failed miserably
due to several factors. First, he had no bipartisan support, which would be needed before any
major reform was passed. Second, current recipients of Social Security were confused and felt
that their benefits would somehow be reduced, and thus lobbied Washington to bury the
proposal. And lastly, the baby boomers, which are the ones that could eventually bankrupt the
system, seemed to care less and didn’t pay any attention.
The discussion then switched to the last major Social Security reform in 1983, which at the time
was supposed to make the system solvent for the next 75 years. Unlike President Bush, President
Ronald Regan had full bipartisan support as Congress overhauled Social Security by increasing
taxes paid into the system, capped monthly benefits, and extended normal retirement age from
65 to 67 for about a third of the population.
Finally, we got to the crux of the discussion on whether Social Security was going broke or not.
Mr. Krugman argued that Social Security becoming insolvent was a myth. He provided an
economist’s point of view that Social Security would never make up more than 3% of GDP (Gross
Domestic Product), it will always have enough resources (as Congress can always raise money
via tax increases) and thus, is not and will not, ever be a major problem. Mr. Tanner took the
opposite view and, according to his organization, The Cato Institute, felt Social Security would
create a $200 billion deficit by 2027 and $300 billion by 2032. He actually backed the President’s
plan for separate accounts as the main savior of Social Security, but felt the President didn’t
properly sell the plan to America. Lastly, Mr. Rother from A.A.R.P. took the middle road and
stated his and A.A.R.P.’s belief that there could be a serious problem, but not until 2040-2045. He
did, however, dismiss Mr. Tanner and the President’s belief that separate accounts are the
answer. A heated discussion of each person’s views went on for about 45 minutes and would be
too long to publish all the dialogue in this article.
So, let me summarize and say that each of the individuals had several good ideas, but a lot of
impractical solutions. Thus, I think this panel underlines the main problem with Social Security,
and a lot of other government issues: too many suggestions, conflicting data, and not enough
real solutions. For once I would like to see data that everyone can agree upon, and then a
discussion on how to fix the problem based upon that data.
The bottom line, and back to my original question, “Will Social Security eventually go broke and
be unable to pay any benefits, or is this a big myth?” After listening to these three “experts,” I
can tell you several things with confidence:
Social Security will eventually become a problem. I think Congress will make some
minor changes in the next several years and thus try to push the problem to 2030-2035.
However, I believe Mr. Krugman is correct in saying that most people won’t care about
it, and Congress won’t deal with it until it starts to become a major problem. Thus, don’t
expect any real Social Security reform for at least the next 10-15 years, except for raising
the income cap from $90,000 to $?, fully taxing benefits and extending normal retirement
age.
Many believe that before any Social Security retirement income reform will/can happen,
Congress must first overhaul Medicare and Medicaid and figure out how to provide
health insurance to individuals that retire at age 62, but aren’t eligible for Medicare until
age 65.
In conclusion, I don’t think the government will ever take away 100% of Social Security income
benefits, rather it could eventually become just like the program it replaced – old-age assistance
for the “needy.” Most people should take their own advice and plan their retirement income
based upon little or no Social Security benefits thus, if ever lost, they will not be financially hurt.
“One sure way to beat any Social Security law change is to continue to develop your own retirement
savings program. By doing so, you would control your retirement and not have to rely on the Government
or your employer.”
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