Dueling Fools Is Social Security Viable?
Bull Argument

By Chris Rugaber (TMF RFK)

( December 29, 1999 ) -- I must be crazy to take the Bull position on this one. Everyone knows that Social Security probably won't last, and that you certainly can't count on it still being around by the time you retire. Almost everyone in the so-called "Generation X" and "Generation Y" age groups is especially cynical about the whole thing, or so we're told. I'm not even going to bother to repeat the famous poll supposedly showing that more college students believe in aliens than believe they'll receive Social Security when they retire (whoops, I guess I just did).

Paging Jedediah Purdy. The oh-so-hip irony and cynicism are getting a bit thick on this issue. If "everyone" knows that the retirement of the Baby Boomers will cause Social Security to collapse under their weight, then Foolishness requires us to consider whether "everyone" might be wrong, as they frequently are.

In fact, there is no reason to believe that there won't be some sort of federal government support for retirees in perpetuity, and it's as likely as not to be called "Social Security." The idea that the whole program is doomed is based on some glib, gloom-and-doom presumptions tinged with the political bias of those who don't like the current system.

Before we go any further, let me clarify what we're discussing here. This Duel is not about the best way to reform Social Security, so all you policy wonks can relax. I'm sure we'll touch on those issues, but this is not The News Hour with Jim Lehrer and I don't work for the Brookings Institution or the Concord Coalition.

In addition, I'm not arguing that everything with Social Security is currently just fine, or that we aren't facing some demographic challenges in the coming years. The question before us is whether or not our current Social Security program is viable enough in a broad way so that Fools of all ages, including younger Fools, can actually factor it into their retirement plans. I would argue that we can.

First, let's remind ourselves of what Social Security is. It is a social insurance program that protects recipients against poverty in retirement. To be eligible for benefits, you must work and pay into the system, but this does not make Social Security a national savings plan, and recipients are not getting back money that they "paid in." Therefore, questions about what kind of "return" you get from Social Security are misleading since it does not represent an investment. Social Security is "pay as you go": current workers are funding the benefits of today's retirees. (For more info on Social Security, check out Al Levit's four-part series for the Fool, which ran in October of '98 -- it's still very relevant. Also check out the Social Security Administration's website.)

Social Security is clearly successful at what it is intended to do: reduce poverty among elderly retirees. Poverty rates among our elderly population -- 9.2 percent in 1996 -- are lower than for all other age groups. According to the liberal Center on Budget and Policy Priorities, without Social Security and other government assistance, up to 50.1% of the elderly population would live below the poverty line. Social Security currently lifts 11.7 million elderly above the poverty line each year, and provides 40% of our senior citizens' aggregate income.

Financing the program is, of course, the real problem. As I'm sure Robert will amply document, continuing demographic shifts will result in larger numbers of retirees being supported by fewer and fewer workers. As a result, current proceeds are only sufficient to fund the program through about 2014. Afterwards, the so-called "trust fund" that has been receiving extra payroll tax receipts will supposedly kick in and make up the difference between what the program's taxes provide and what Social Security pays out. Around 2034, however, the trust fund is projected to run out (just in time for my 65th birthday!).

Not that the 2034 date really matters, because in reality, the "trust fund's" proceeds have been merrily spent by the feds as quickly as they've come in, and the fund really consists of a bunch of IOUs in the form of special Treasury notes. Therefore, even tapping the trust fund will require additional federal money. So the "trust fund" isn't going to be that much of a help, and 2014 or so is the real drop-dead date.

Despite these challenges, it's important to keep a couple of things in mind. First, despite all the talk you hear about the "solvency" of the program, Social Security is not a bank or a savings and loan that is going to go bankrupt while we all watch helplessly. It's not as if it has a static amount of resources. It is a government program that has an inflow of cash, primarily from payroll taxes, and it pays out a huge amount of money to its beneficiaries (with very low overhead, incidentally). When the inflow and outflow get out of whack, they can be adjusted.

Of course that's much more easily said than done, but the adjusting of the program's finances is a matter of political will. Certainly the resources available are not infinite, so some of these "adjustments" will probably result in benefit reductions to some or all of the future recipients, but eliminating the program altogether is unnecessary.

In addition, currently over $400 billion worth of payroll taxes flows into Social Security annually, and it's unlikely that the government will simply stop collecting those funds. (It's not like bureaucrats and politicians really hate handling all that money.)

More importantly, the elderly are increasing in number, and they vote, and as a related point, our political system has demonstrated repeatedly that it will respond to their demands. So when you combine a desire on the part of politicians to keep money with the desire of the elderly to maintain a social insurance program, you're talking about some powerful forces that will probably provide the political momentum necessary for reform. Even if part of your payroll taxes are someday funneled to a private account -- which I am not totally opposed to -- there will probably (and certainly should) be a safety net program similar to today's system of direct payouts for those who need it.

So don't believe the hype. Maybe there are space aliens, but I am more confident that I will receive Social Security benefits in the future than I am that aliens exist.

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