The Social Security 'crisis' is a fabrication

by Don Kuehn

Before the tragic events of Sept. 11, 2001, there was a lot of talk about the federal budget surplus and the so-called lock box that was supposed to hold Social Security's excess contributions.

Not a few opportunists were using the downturn in the economy to create the illusion that the Social Security system was teetering on the brink of disaster; that the only salvation for the wounded program would be to allow individuals to invest part of their contributions into "private accounts."

Well, the truth is the lock box is a myth. The trust fund is a myth, and private accounts would be a massive, costly myth-take.

It was a calculated political play leading up to the elections of November 2000 to speak of locking away excess Social Security funds far from the reach of everyone's favorite "straw man": the U.S. Congress.

In fact, there is no place for the Social Security Administration to hide money. The SSA is prevented by law from retaining excess revenues in anything resembling a savings account. Instead, the funds revert to the general treasury and IOUs are issued in return.

For the past few years, these revenues were being used to pay down the federal debt. That's good. But barring more Bush tax cuts, eventually the debt will be paid and Social Security will still be collecting more than it pays out in benefits.

By some accounts, the program that supports millions of senior citizens, surviving spouses and children, and the disabled will pay out an estimated $419 million more than it collects in 2025. But that will only be about 1 percent of the projected GDP (gross domestic product) and roughly half of the amount that the first Bush tax cuts will cost the economy in the same year.

That's not to say that the system couldn't benefit from some fine-tuning. But relatively modest changes--such as increasing the wage base on which Social Security taxes are paid, allowing the system to hire professional money managers to diversify investments for a greater return (like your state retirement system), adding newly hired state and local workers to the Social Security tax roles, and possibly further adjusting the age of full retirement benefits would be more than enough to make the system secure as far into the future as can be projected.

But the greatest travesty being discussed is the prospect of creating "private accounts" with part of each person's Social Security contribution. In theory, everyone could divert a percentage of his or her withholding into stocks or mutual funds and, so say the proponents, be way ahead when it's time to retire.

The president created an advisory panel made up only of people who endorse the idea of individual accounts to "study" the issue and come up with a recommendation to create individual accounts. Tricky, huh?

Under the most discussed scenario, 2 percent of your Social Security tax would be diverted into an account managed by a private firm. You would in effect be investing in a giant mutual fund of stocks and bonds. The massive infusion of money into the stocks of selected companies could potentially tip the delicate balance of the marketplace.

Those who fail to actively invest would, presumably, default into some kind of money market account. Current returns barely exceed inflation. The growth on those dollars not only would be less than in current Social Security accounts, it would be far less.

So much for the empty promise of a prosperous retirement.

At 2 percent a year, about 40 million workers would contribute less than $80 a year  to their accounts, according to Dallas Salisbury, president of the Employee Benefit Research Institute. Deduct expenses, add growth (or losses) on the account and that 80 bucks a year doesn't add up to much of a nest egg.

Who is going to accept these "nuisance" accounts worth less than a hundred dollars? How will the money that's deducted from your paycheck be transferred to one of thousands of vendors, and how long will it take?

And what would happen to the millions of records that can't be matched to individual accounts? There were some 60 million transactions last year where Social Security numbers were wrong, companies went out of business or paper documents were illegible. This would be a nightmare!

At retirement, you would be required to roll at least part of your private account into an annuity. That's how you'd get your monthly income. I have written before of the dangers of "sharks" that prey on the unsuspecting with products wrapped in unneeded insurance and bearing high costs (see: "Shark Attack" at www.aft.org/pubs-reports/your_money).

The Congressional Budget Office estimates that as much as 30 percent of each private account could be eaten away by administrative costs. That compares to less than 1 percent within the current system.

It's one thing for well-heeled politicians and industry scions who grew up watching daddy manage the family fortune to invest part of their Social Security taxes. But what about the marginally educated? The minimum waged? The economically illiterate?

In an age where cash registers calculate change, where dollars and cents have been replaced with pictures of hamburgers and fries, where scanners laser your bar-coded purchases, isn't it a stretch to suggest that everyone who holds a job will be able to make informed investment decisions?

Private accounts would expose retirees to a great deal of unnecessary risk and high costs. Imagine depending on a private account when the financial markets are swooning or when the economy is in recession.

So, let's see a show of hands. Who wants to trade an account guaranteed to provide lifetime benefits--that supports widows, children and the disabled; is indexed to inflation and has low administrative costs--for a high risk, shot-in-the-dark plan designed to benefit Wall Street investment companies?

Social Security was never intended to provide the sole source of income for the elderly, the disabled or survivors. It is a foundation on which to build with investments, pension plans and savings. America's covenant with its elderly is not going to be broken. The only major threat to it comes from those who would hijack Social Security to advance a political agenda when all it needs is a tweak here and there.