Should You Count on Social Security?

No wonder a recent survey found that more Americans believe in UFOs than believe that Social Security will be there for them in retirement. Young adults in particular are paying more into the system than any previous generation-and they may get little or nothing back when they retire.

The first person to receive Social Security was Ida Fuller, who retired in 1940 after paying into the system a grand total of $44. By the time of her death in 1975, she had received $21,000 in benefits. Those who retire in 1995 will get back what they paid in about six years. But younger workers who hope to get back what they paid had better eat their Wheaties and plan on living for a century or more.

Back in the 1930s, when Social Security was founded, the most anyone was forced to pay in a year was $30 (1 percent on income up to $3,000). The average worker today pays almost 100 times that much--7.65 percent on income up to $61,200. These rates and income ceilings are being jacked upward regularly, and they must be matched by employer dollars, all of which stifles job creation and drains more and more capital out of our economy.

Social Security is built on a pay-as-you-go system. Benefits to the elderly are tied not to what they paid in, but to taxes on younger workers. The health of the system, therefore, depends upon the ratio of workers to retirees. In 1935, this ratio was 55 to 1. As eligibility expanded and life expectancies lengthened, the ratio declined from about 7 to 1 in 1950 to below 3 to 1 today. The government says this ratio will be less than 2 to 1 by 2030, which means that each retiree will have to be supported by fewer than two active workers!

The pay-as-you go system and the falling worker-retiree ratio are already eating away at the system's fiscal integrity. True, Social Security ran a surplus of more than $40 billion in 1994. But two of its trust funds-disability insurance and hospitalization insurance-will both be losing money in five years. What's worse, the government's actuaries now say that, in the absence of major changes, the whole system will be bankrupt long before today's 20-year-olds reach retirement. In other words, this Ponzi scheme is coming to an end.

The burdens of Social Security have been especially onerous for the state of Michigan because Michigan has fewer retirees per capita than most other states. The cold weather plus the progressive double inheritance tax (finally repealed in 1993) has encouraged retired folks to leave the state. In dollar terms, Michigan workers sent $18 billion in Social Security taxes to Washington in 1993; but only $16 billion came back to the state in Social Security benefits. In other words, many former Michigan workers, now retired, are spending their checks building up the economy of Florida, which has long had no state inheritance tax.

For the sake of our young workers-and for the future of Michigan-we need to take steps now to fix the problem. Reducing benefits to current recipients or at least to those nearing the retirement age would allow a surplus to emerge, making it possible to finance the retirement of the baby-boomers early in the next century. Most nations of the Pacific Rim have avoided the pitfalls of our pay-as-you-go system by tying retirees' benefits to their own contributions, an idea we should consider seriously.

Better yet, the major problems with Social Security could be solved by privatizing the entire system. Fourteen years ago, Chile was experiencing precisely the same problems with its system as we are facing with ours today. In one of the most successful public policy reversals in the world, now a model for other nations, Chile privatized retirement security. Under the new system, workers contribute a portion of their earnings to approved, private funds which compete with each other for the right to manage individual accounts.

The Chilean plan has proven to be wildly popular because workers are ending up with more than the old system ever promised them, and the economy has benefited because of increased private investment. During a phase-in period in which participation was voluntary, over 90 percent of Chileans opted out of the old system in favor of the new. Their payments to the old system were reimbursed in the form of government bonds. This privatized arrangement is relatively immune to political pressures and ties benefits to contributions, making it vastly more sound than a government-run arrangement.

The time remaining to fix the Social Security problem is dwindling. In the next decade or two we have a choice. We can either extend the American dream to our sons and daughters or we can hand them what they will call the American nightmare: sky-high Social Security taxes for a retirement pittance.