Commentary; Posted: 2/16/05
Social Security ó a careful review is in order
Dave Purdy
Guest Columnist
President Bush has made Social Security reform a key part of his second term domestic policy agenda. The last major policy review by the Greenspan Commission was in 1983, and the reforms enacted then helped but did not completely restore the actuarial stability of this ěpay-as-you-goî system.
Social Securityís defined benefit program works as long as the ratio of workers to retirees remains roughly stable at high levels. However, the ratio of workers to retirees has been falling. It was 16 to 1 in 1950, 5 to 1 in 1960, 3.3 to 1 now and is projected to fall to 2 to 1 in 2040.
At these low ratios, benefits are projected to exceed payroll tax contributions starting in 2018 and the projected shortfall worsens after that. ěPay-as-you-goî breaks down.
Another problem with Social Security is that there is no ělock boxî with real assets in it. The ělock boxî contains $1.5 trillion in federal government IOUs.
Calling those IOUs will force painful adjustments elsewhere in the federal budget.
What to do?
There is heated debate over whether we have to do anything.
However, Social Securityís Chief Actuary says there is $5 trillion shortfall over the next 74 years so I think a careful review is in order. Also, the bipartisan Social Security Advisory Board has stated, ěAs time goes by, the size of the Social Security problem grows.î
That doesn't mean we cannot wait, but it might be better to debate the issue, do serious fact-finding and, if need be, come up with at least partial solutions now.
Solutions are not easy. Seemingly simple solutions like raising payroll taxes or cutting future benefits are problematic.
Under current tax and benefit schedules young workers will collect benefits that are, on average, about equal to what they pay in ó no interest, no capital gains, no return on investment, no inflation protection.
So if taxes are raised or benefits cut, young workers end up paying in more than they are likely to get back. That is viewed as too bitter a pill to swallow.
The president proposes to sweeten that pill by combining future benefit cuts with private savings accounts.
Maybe that is a good idea, maybe not. Others have proposed running budget surpluses now to reduce the $4.4 trillion in publicly held federal debt outstanding in order to create capacity to reissue public debt when Social Security benefits begin to exceed contributions in 2018.
The IOUs in the ělock boxî could be cashed in and public debt reissued as needed, providing a buffer.
There are other proposals and options worth review. I hasten to add that I believe it is unlikely that benefits will be cut for those in, or near, retirement.
I do not have the answers, but studying and debating potential problems with Social Security will help us better understand the issues and assess the uncertainties and risks. That is just sensible retirement planning. I will watch this debate closely and report on developments that might affect your retirement.
Writer David Purdy is president of Wealth Management Midwest, Forest Lake, and offers securities through Linsco/Private Ledger, Member NASD/SIPC and an investment advisor.
Forest Lake Times
P.O. Box 218
880 SW 15 St.
Forest Lake, MN 55025
651-464-4601
Fax 651-464-4605