Less than two years after ”saving” Social Security, President Reagan and Congress are edging back to the issue, with the cost-of-living adjustment the focus of discussion this time.
Unfortunately, a COLA freeze is neither popular politically nor a cure for the system`s serious long-term ills. Instead, Congress and the President need to look beyond this year`s deficit in reviewing Social Security.
One innovative reform package, which would allow younger workers to partially opt out of Social Security by investing in individual retirement accounts, has been offered by the Heritage Foundation`s Mandate for Leadership report. The administration rushed to disavow the proposal–designed by former White House aide and Cato Institute scholar Peter Ferrara–barely two weeks after Reagan`s record-setting electoral triumph.
However, Reagan should not foreclose any step to head off the coming Social Security crisis, which could dwarf the system`s threatened insolvency two years ago. Then, a $165 billion tax increase was sufficient to prop up Social Security; Reagan declared that the legislation, based on the recommendations of the Social Security Commission, ”demonstrates for all time our nation`s ironclad commitment to Social Security.”
But the ”for all time” solution could unravel as quickly as did the $227 billion tax hike of 1977, which was to have assured the financial integrity of the system well into the 21st Century.
Last year the New York-based Committee for Economic Development warned that if the economy performs even slightly less robustly than Congress projected, Social Security may ”be threatened again with insolvency before the end of this decade.” Unfortunately, the commission and Congress were unduly optimistic with almost all their projections; ”based on experience,” the CED concluded, ”we can expect the facts to depart substantially from the forecast values.”
For example, the commission predicted permanent rates of inflation, unemployment, real wage growth and productivity that haven`t been seen in years. It also assumed a reversal in the direction of fertility rates and life expectancies. Thus, if recent experience repeats itself–and Social Security will remain uniquely vulnerable to economic and demographic changes as long as it operates on a pay-as-you-go basis–the system will expend far more and collect far less than currently expected.
Even if today`s favorable economic growth and inflation rates persist, allowing Social Security to scrape by this decade, a number of experts estimate that tax rates of 40 percent or more will be necessary to keep the program afloat in later years.
The only long-term solution to avoid a fiscal disaster and the generational warfare that would result is to split the welfare and retirement aspects of Social Security. The young could be allowed to use expanded IRAs, or some other actuarially sound vehicle, to guarantee their retirement income, while a regular income-transfer program, like welfare, would be used to protect those unable to save for the future or to care for themselves when elderly.
Under Ferrara`s proposal, current beneficiaries would continue to receive their checks, while workers would be allowed to invest in an IRA and to take a credit against their income tax equivalent to 20 percent of the Social Security taxes they paid (they could direct their employers to make a similar contribution). Social Security benefits would be reduced proportionally.
Though such a program would reduce general revenues, it would increase the fiscal soundness of Social Security by cutting future outlays. More important, an IRA-based system would be fairer. For today`s younger Americans are the final victims in a 50-year Ponzi scheme. The early investors in Social Security, the elderly now collecting checks, are receiving between 2.7 and 5 times as much as they and their employers contributed, plus interest. But the Department of Health and Human Services figures that a 25-year-old now entering the system will lose tens of thousands of dollars over his lifetime
–if the money is there to pay his benefits.
The Ferrara plan really is the administration`s only option. Sharply expanding IRAs is the one way to protect Americans` retirement lifeline while fulfilling his campaign pledge to neither cut Social Security benefits nor raise taxes.
