NEWS INDEX Archives 2006 March

Social Security still imperiled, says scholar who promoted Bush plan

Mark Reutter, Business & Law Editor
217-333-0568; mreutter@uiuc.edu

3/17/06

CHAMPAIGN, Ill. — While the Bush administration’s efforts to change Social Security have faltered, the ticking time bomb of a revenue shortfall has not gone away, a University of Illinois expert warns.

Jeffrey R. Brown, a professor of finance in the College of Business who was active in crafting and promoting the administration’s Social Security package, argued that changing demographics and an aging population still threaten to place an increased tax burden on younger workers.

Writing with two other scholars in the Elder Law Journal published by the Illinois College of Law, Brown called the argument that Social Security will be financially sound for decades to come as a “myth” that has gained public acceptance.

“The real economic and fiscal pressure that arises from the collision of demographic change and a pay-as-you-go financial structure starts much sooner – as early as the year 2008, when as a result of baby boomers starting to claim benefits, Social Security’s cash flow surpluses will begin to decline.”

For the last 20 years, Social Security has been running surpluses, totaling about $1.7 trillion at the end of 2004. But these surpluses will change to deficits by 2017, and a yearly deficit will grow thereafter.

Social Security could still pay retirees at the current benefit level until about 2041, but the surplus funds would have to be withdrawn from U.S. Treasury accounts, causing a strain on government finances. “Ultimately, this money can only come from one of three sources: higher taxes, reduced government spending or the issuance of additional debt that will eventually have to be repaid through higher taxes or reduced spending.”

To maintain the current benefit level in 2050, Social Security payroll taxes would have to be 36 percent higher than today, according to Brown.

While economic growth and labor productivity may eliminate some of the future shortfalls in revenue, this is not guaranteed. “The bottom line is that, yes, future projections are subject to considerable uncertainty. But to avoid making politically difficult policy corrections based on the fact that the future might turn out better than expected is unwise,” the paper argued.

At the same time, the authors criticized “the crisis language” that Social Security “will not be there in the future.” (In his State of the Union address last year, President Bush said that the Social Security system “on its current path is headed toward bankruptcy.”)

“The idea that Society Security will not be there for younger workers unless the system changes is incorrect,” the authors wrote in the Illinois journal.

“Under the intermediate assumptions of the Social Security Trustees, even if policymakers make no changes to the system and Social Security is unable to pay full benefits after the Trust Fund is exhausted, future retirees will still get approximately three-quarters of what is scheduled under current law.

“So the question facing today’s younger workers should not be, ‘Will I get anything out of Social Security?’ but rather, ‘Just how much will I receive when I retire, and how much will I have to pay in taxes before I get there?’ ”

The authors also disputed the idea, which is often floated by advocates of the Bush proposal, that redirecting Social Security contributions into personal retirement accounts would provide Americans with higher rates of return.

A comparison of stock market rates of return to the internal rate of return of Social Security revenues is not valid, they noted, because Social Security must pay interest on so-called “legacy debt.”

This debt covers retirees who received added Social Security benefits (as compared to their payroll contributions) in the early days of the program, which lowers Social Security’s rate of return.

“Importantly,” the authors pointed out, “the legacy debt exists regardless of whether payroll taxes continue to flow into the current system or are instead diverted into personal accounts.”

There are many good reasons to support personal retirement accounts, such as bringing the benefits of an “ownership” society to more Americans. But none of the reasons “obviate the need for other reforms that reduce long-run expenditures or increase the long-run revenue stream dedicated to Social Security,” they noted.

“It was a recognition of this economic realty that led President Bush, despite the potential political risk of doing so, to endorse additional steps to reform Social Security, such as moving from wage indexing to progressive price indexing, which would substantially reduce long-run Social Security expenditures.”

Titled “Top 10 Myths of Social Security Reform,” the journal paper was co-written by Kevin A. Hassett, director of economic policy studies at the American Enterprise Institute, and Kent Smetters, a professor at the Wharton School at the University of Pennsylvania.

Brown served as an economist on the President’s Commission to Strengthen Social Security. He periodically traveled with President Bush last year in the White House’s campaign to drum up public support for personal retirement accounts.