A pyramid scheme we can afford to lose
By Laura Vanderkam
http://www.usatoday.com/news/opinion/2005-03-09-younger-benefits_x.htm
Everyone's talking about saving Social Security. In the days of budget surpluses, President Clinton said we should "save Social Security first." Now President Bush is touting personal accounts as a way to fix the looming cash crunch.
Democrats say there's no crisis — we need to save Social Security from Bush. All this talk of "saving" is sounding more like the Old Fashioned Revival Hour than a policy debate. What I haven't heard asked is why we're saving Social Security in the first place.
Most young people don't expect its salvation. A recent Washington Post/ABC poll found 80% of 18- to 30-year-olds don't expect that Social Security will be able to pay our benefits in years hence. That sounds like pessimism, but it's actually an opportunity.
Given low birth rates and rising life expectancies, in time, Social Security won't be able to sustain our elderly population without punitively taxing workers.
Bush's proposed personal accounts are a start to addressing this flaw. Trouble is, he wants them for the wrong reason. "We must make Social Security permanently sound," he says. But the only permanently sound solution to the problem is to get the government out of the retirement business. Young people will fund the transition — paying off retirees without getting benefits — if politicians will, please, then let us alone.
Thanks, but no thanks
Tales of Social Security's popularity are overblown.
Sure it's popular — among well-heeled geezers who have time to write their congressmen. I can see why.
What other program, meant to guard against the "hazards and vicissitudes of life" (to quote Franklin Delano Roosevelt) including a "poverty-ridden old age," produces tales like this recent USA TODAY gem?
"Bill Mossman, 78, stopped working at 62. He's had a joyous retirement — traveling, studying, working out three times a week and assembling a giant collection of historic jazz recordings. Social Security's early retirement age made it all possible. 'I took Social Security benefits right away. We wanted to travel and needed the cash flow,' says Mossman."
Hazards? Vicissitudes? Historic jazz recordings?
For Gen X, though, this program sounds awful. No matter how poor you are, you pay 12.4% of your income, every year, to maintain Mossman's cash flow.
Sure, Mossman paid in, funding other retirees. Their taxes funded original recipients who didn't pay a dime. This is the classic definition of a pyramid scheme, which eventually has too many folks to pay off with too few suckers paying in. Thanks to the 1946-64 baby boom, Gen X is firmly in the "too few suckers" bin.
So, sometime in my lifetime, Social Security will explode in the form of tax hikes or borrowing, all because of an attempt to alleviate elderly poverty in a way that makes no sense. It is true that one-third of Social Security recipients rely on it for 90% of their income. But we can aid the elderly poor who can't work or rely on family without propping up a pyramid scheme that pays off wealthy retirees to buy support for the system.
FDR's choice to make Social Security a pyramid scheme instead of a poverty program has given us a ticking bomb. The most sensible plan is to take the bomb apart while we have time.
A shared sacrifice
Defusing a bomb is never easy, and it will require shared sacrifice. We can lower future liabilities by trimming payments for the jazz-record-collecting set. The retirement age can rise several more years. Those over 50 can have their payroll taxes, and benefits, reduced. They'll have some time to save. Those over 35 can have their taxes phased out during the next decade, with an understanding that benefits will be even more limited.
But the real key to defusing a pyramid scheme is finding folks willing to pay in, for a while, expecting nothing in return. Here's where twentysomethings' fatalism becomes a blessing. I bet we'd pay in 12.4% for 10 more years to fund the system, even knowing we'd never see a penny. That sounds harsh, but if 80% of us don't expect benefits anyway, it's realistic — and feasible. Few of us vote, after all. And a 12.4% tax cut during our highest-earning years would soften the blow. Provided politicians use our cash to cover Social Security liabilities and not mask spending, this should help cover the gap.
Without guaranteed benefits, we'd have to save for our own retirements. It's not a habit we're in now, but habits can change. For twentysomethings, more cash and a smaller safety net are two incentives to save.
Future generations should learn financial literacy in school. If kids can learn to add, they can learn about mutual funds, risks, diversifying and rates of return. They can learn that building up credit card debt is as naughty as hogging toys.
Of course, trusting people to make their own retirement decisions is not a habit politicians are in either, so I don't see the "End Social Security Act" being introduced soon. That's why Bush's personal savings accounts are a start. But we should keep in mind that if 4% of income devoted to wealth building is good, 12% is better.
Even a few thousand dollars invested annually can make you a millionaire in 40 years. That kind of wealth is an insurance against hazards and vicissitudes that Social Security can't pretend to supply.
