Social Security must be reformed to be saved

A commentary published today in the San Francisco Chronicle suggests that the only way to save the Social Security system is to reform it -- and the author is talking about major reform.  No more of this "Don't mess with Social Security" political hype by candidates afraid to tackle big issues.

Here is what Gary M. Galles, a professor of economics at Pepperdine University, had to say:

Alan Greenspan's recent reiteration of the truth that Social Security is trillions of dollars short of being able to live up to its commitments has triggered the usual response -- political pandering.

Democratic presidential candidate John Kerry was a front-runner in that area as well. While he has offered nothing constructive about how he would deal with Social Security's looming crisis, he was quick to rule out Greenspan's modest proposals and anything else that would ever reduce benefits. He has also strongly ruled out any sort of privatization approach.

Kerry's "don't mess with Social Security" approach rules out virtually every workable approach to reform, and implies that no change could possibly improve it. But that position is indefensible. Change is unavoidable, because Social Security is unsustainable as it is. No amount of hiding behind the red herring that the huge cost (more than $1 trillion) of transitioning toward a privatized system (which is not really a cost, but rather recognition of Social Security's unfunded liability) can change that. Further, Social Security is not only full of inequities, it deprives Americans of many valuable options.

When Americans' private saving for retirement is replaced with Social Security, they lose their ability to choose their investment portfolios (including the ability to alter them with age and circumstances) and the combination of risk and return they wish to bear in financing retirement. Instead, workers are denied even the rate of return available from risk-free government bonds.

Substituting Social Security for private savings sacrifices the ability to leave accumulated retirement savings as a bequest, if the beneficiary should die before retirement. It sacrifices the ability to choose a lump-sum distribution of retirement savings, rather than being forced to receive a monthly annuity. It sacrifices the ability to use accumulated funds for emergencies that might occur prior to retirement. It sacrifices the ability to retire and live on accumulated savings before the official retirement age. It also sacrifices the option of financing one's later years by continuing to work, forcing some to pay taxes to fund a far earlier retirement than they want.

Over time, Social Security has also reduced the options of workers by lowering their real incomes. As Americans have substituted Social Security's unfunded promise of retirement benefits for private savings, investment has been reduced. This has slowed the growth of the capital stock (especially in conjunction with corporate income, capital gains and property taxes, which also reduce capital accumulation). With less capital to work with than otherwise, productivity is below what it would have been, and workers' earnings are lower as a result. This effect compounds over time, raising the burden with each successive generation.

In addition to options lost to Social Security, its structure guarantees inequities. It gave earlier retirees a far better deal than later generations. For instance, the expected lifetime benefit-to-tax ratio for an average- earning 65-year-old single man retiring in 1950 was 966 percent, while it had fallen to one-tenth of that for one retiring in 1995. It is estimated to fall to 71 percent for those retiring in 2025, and decrease notably after that. Because benefits are only available monthly after retirement -- and not in lump sums -- those with shorter life expectancies are treated far worse than those with longer life expectancies. Similarly, because taxes are paid over one's entire working life, but only the highest 35 years of earnings determine benefits, those who begin work at younger ages, including those with the fewest years of education, are penalized.

Social Security also treats single people worse than married people, because noncontributing spouses are eligible for benefits. Nonworking spouses, who are eligible for 50 percent of their spouse's benefits, but pay no Social Security taxes, are also treated far better than working spouses, whose Social Security taxes often add little or nothing to their retirement benefits.

In addition, the U.S. Supreme Court has ruled that, unlike private savings for retirement, Social Security "contributions" do not entitle workers to the promised benefits they supposedly finance, making its retirement benefits only as certain as the reliability of future politicians.

If Social Security were efficient, equitable, reliable and sustainable, "don't mess with Social Security" would be a sensible approach. But Social Security is none of these, and delaying adjustments that must occur will perpetuate its problems and make things far worse later. That is why the "leadership" Kerry has offered in this area -- promising beneficiaries what cannot be delivered in the long term, while ruling out almost every viable reform option -- is not the kind Americans should be happy to follow.