Critique of National Public Radio Broadcast
on Social Security

By: Pam Fessler
Morning Edition, May 20, 1999

The NPR broadcasts on Social Security help the listener understand some features of a system that is widely misunderstood. But the reports tend to perpetuate other sources of confusion, often by citing or quoting misleading information without offering any other analysis. Bernard Wasow, Senior Fellow at The Century Foundation, will produce responses to the NPR reports, clarifying some points that otherwise might be understood.

1."...Social Security needs major changes to keep it from running out of money in 35 years...The majority are not counting on Social Security for any retirement income..." John Ydstie, National Public Radio


News of Social Security's impending death is exaggerated. Every year, the Social Security projects its performance for the next 75 years. The most recent projections show Social Security able to meet 100% of its obligations for the next 35 years. Even under the conservative assumptions used by the Social Security administration we would still be able to pay 75% of Social Security obligations forever; this is not a system near collapse. Any projection 35 years into the future is very hazy, and for several years now, in response to our robust economy, the projected "crisis" date has been shifted further and further into the future. In fact, if our economy continues to do well, we might have no trouble at all. To be more certain we could take further preventative action. If we dedicate a small additional amount of our tax revenue to the Trust Fund every year to prefund Social Security, we could avoid a problem even if the pessimistic forecasts are right. In 1970, the Y2K problem was more pressing than this "crisis" is today.

2. "Someday in the future [the government] is going to have to find the money to pay [off the securities in the Social Security Trust Fund]." Michael Tanner, The Cato Institute

"It's like the proposals to use the surplus to fix Social Security. The retirement system just ends up with a pile of IOUs that the government eventually has to repay." Pam Fessler, National Public Radio


Government bonds do represent government promises to pay in the future. But by using its budget surplus to retire government bonds held by private parties, the government is adding to saving and investment in the economy. This increases the economy's capacity to produce, adding to the future tax base, which ultimately is what we need to meet future Social Security obligations. What is more, by replacing IOUs to the private sector with debt held by the Social Security Trust Fund, the government is shifting its future obligations specifically to old people.

3. "...young workers could be getting a much higher rate of return if they were allowed to invest their tax dollars in the stock market." Pam Fessler, NPR


Investment in the stock market can be undertaken through the Social Security Trust Fund much more efficiently than through privatization. Today, the law requires the Trust Fund to hold nothing but government bonds. If this law is changed, as President Clinton has proposed, some of the Trust Fund could be invested in stocks. Trust Fund stock investments would outperform the average small private account. That's because small private investment accounts have high administrative costs and are therefore much more wasteful than a large investment account. Historically, an excellent investment strategy, for an individual or for a giant Trust fund, is to buy a broad index of the market and to hold it without active management. This strategy would be easy to operate through the Trust Fund, using rigid and simple rules, without any political interference. Investment of the Trust Fund in stocks would lead to far more resources for old people than if the same potential savings were dissipated into millions of high-maintenance individual accounts. Wall Street loves the prospect of these administrative fees, but their gain would be at the expense of tomorrow's retirees.

4. "...the current system gives the average worker a 1.8% return on contributions while the stock market has yielded average annual returns of over 7% after inflation since 1926." John Ydstie


Today, 90 cents of every dollar of Social Security taxes goes straight out as payments to today's retirees. In a pay-as-you-go system, where taxes on workers are transferred to retirees, there is no investment and no rate of return. Early participants in Social Security got back much more than they contributed, because they paid little in taxes to Social Security while they received a lot of support when they retired. As the Social Security system has matured, the "rate of return" has fallen. When the baby boom generation retires, its children will face the challenge of supporting them. If we look only at the 10 percent of Social Security taxes that are invested in the Social Security Trust Fund, the government can get a better rate of return than the average small investor. By pooling citizens' contributions and investing in an index of the market, the Trust Fund can get a return better than two thirds of professional portfolio managers. If we choose to save more for Social Security, the government can implement this easily and effectively. The Trust Fund is an excellent way to invest.

To focus on rate of return to retirees also ignores Social Security's many insurance functions. Social Security pays benefits to workers who become disabled and to family members of deceased workers. By guaranteeing minimum benefits, it assures even the working poor a dignified retirement above the poverty line. Through cost of living adjustments, it insures beneficiaries against inflation. More than any other aspect of Social Security, Americans rely on the guarantee of a universal dignified retirement for workers and their families, no matter what their luck.

5. "...[in a privatized system] people who do the worst in it probably would get as much as they are getting out of Social Security..." Stephen J. Entin, Institute for Research on the Economics of Taxation


Private accounts are risky and they are costly to manage. Further, many of the benefits of Social Security system go beyond its retirement plan for workers. Millions of widows and children as well as disabled workers are supported by Social Security. Divorced wives are eligible for benefits. Social Security benefits also are indexed to the price level, so every retiree and survivor is guaranteed secure purchasing power regardless of inflation. Social Security benefits are guaranteed for life, which means that people who live long - mostly women in our society - need not fear that their income will run out. Not only retired workers, but millions of others depend on Social Security. All of this would be threatened by a shift to private accounts.

6. "We should have a safety net but retirement saving should be separate...People should pay out of general revenues to have a safety net under the poor." Stephen J. Entin, IRET


The average Social Security check is less than $900 per month. Social Security is our safety net for old people. If we permit citizens to manage their own small accounts, but guarantee them an income comparable to Social Security, what is to limit the risks they can take. What is to prevent them from using up their private nest eggs early in their retirement and then relying on the safety net? Private accounts plus a safety net is a recipe for a cost explosion; we would end up with a tremendous new burden on general revenues. We have an example of such a problem with long term nursing home care, where some seniors plan to give their children gifts or otherwise spend down their own wealth in order to become eligible for Medicaid. Social Security is our basic minimum support system. Any private accounts must come on top of Social Security.


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