Savings are low, debt is mounting, the dollar is weak, and the economy is projected to grow more slowly in this century than the last. But that's not the half of it. What we really have to worry about, according to a chorus of prophets, is the prospect of Americans living too long. This failure to die in a timely fashion apparently means no end of trouble for younger citizens -- and even represents some kind of accounting swindle in which the long-lived threaten to take more out of the economy and Social Security than they ever put into it!
This is the sort of tortured reasoning that Americans -- especially younger Americans -- confront when trying to understand what remedies are needed to keep a basic safety net in place for retirement. According to President Bush and his allies, the transition to a longer-lived society lies in stripping out some of the funds currently going to Social Security and using them for personal accounts, largely invested in the stock market. Bush's plan for partially privatizing the program is marketed to young adults as a much better deal for them than the current system.
It is not surprising that the notion is appealing. Today's youth have grown up during a time when investment in the stock market among ordinary Americans has grown markedly. Further, a lot of 20-somethings who have graduated from college are more likely to be juggling sizeable student loans than ﬂush investment portfolios. And young people in general are just beginning to learn the hard lessons of easy credit-card debt, car payments, and stagnant wages. Holding out the seductive chance to invest a small portion of one's payroll taxes in stocks sounds like getting something for nothing. In addition, young people, like the rest of us, have been exposed to a relentless campaign based on the false notion that Social Security won't survive the retirement of the baby-boomer generation.
But recent analyses show that if Social Security is converted to a system of private accounts, younger Americans would be the ones who'd bear the greatest share of the trillions of dollars in extra costs required for the “transition” to the promised land of privatization. These costs derive from the combined effects of beneﬁt reductions and huge increases in federal borrowing to ﬁnance the proposed new accounts. Meanwhile, the current system would continue to rely on payroll taxes for existing beneﬁts for present and soon-to-be retirees.
There is another reason for caution. When you are young, you should assume that you'll be one of life's winners, to be sure. But experience should teach us that not everybody comes out on top, either in the lottery of life or in the stock market. And, should many of these new private accounts go south because of market declines or other misfortunes, the younger generation, in its own old age, would ﬁnd itself lobbying its own children and some future Congress to bail them out of looming poverty. After all, markets work because they produce unequal results -- just what young people count on whether they go to work on Wall Street or buy the occasional lottery ticket.
Reﬂecting the fact that private accounts are no guarantee of future prosperity, consider the cumbersome accountant's language of the nonpartisan Congressional Budget Ofﬁce (CBO). “To raise the rate of return for future generations by moving to a funded system, some generations must receive rates of return even lower than they would have gotten under the pay-as-you-go system,” the CBO recently reported. In other words, one generation must pay for the cost of retirement for two: those ahead of them, and their own.
The CBO also analyzed the second of the three private account proposals from the President's Commission to Strengthen Social Security, the proposal that some think will be the basis for the plan that will be sent to Congress. The CBO compared the commission's plan to two possible scenarios for the traditional Social Security system, one with payments continuing in full indeﬁnitely and the other with the trust fund becoming depleted in a few decades and payments to retirees shrinking from 80 percent to 70 percent of their current levels. In both scenarios, nearly all those born between 1960 and today would do worse, on average, under privatization proposals.
Another analysis of the commission's “plan two” by economists Peter Diamond and Peter Orszag found that a worker who was 25 years old in 2002 and retired in 2041 at age 65 would see his or her retirement beneﬁts reduced by 25 percent compared with beneﬁts scheduled under current law; a 35-year-old worker would see a reduction of 17.4 percent. Pity the 15-year-old who hadn't even started working in 2002; he or she would see a 31.8-percent loss in beneﬁts by retirement age.
Another way to create private accounts is to divert general funds collected from income and other non-payroll taxes to Social Security. Senator John Sununu and Representative Paul Ryan have proposed plans along those lines, requiring about $7.1 trillion (in present value dollars) to be transferred from general revenues over time. While that approach might mean that young people wouldn't suffer short-term beneﬁt cuts, any proposal that funds current beneﬁts through general revenues would add to debt that eventually would be paid back by today's younger generations and their children through increased taxes and reduced government services.
The closer young people look at privatization proposals, the less appealing they will ﬁnd them. In December, a Washington Post/ABC News poll showed that support for private accounts among 18- to 30-year-olds dropped from 67 percent to 45 percent when respondents were told that such accounts could cost as much as $2 trillion. No doubt support will drop even more sharply as young people come to understand how their beneﬁts could decline with private accounts. Since Social Security started in the 1930s, younger generations have been expected to help support their parents' generations in their retirement. It is a lot to ask them to both support older generations and pay for the transition to private accounts through reduced beneﬁts, increased taxes, or both.
On top of that price tag, young people would also confront new risks associated with the market's ups and downs, future inﬂation, and administrative and annuitization costs. A recent New York Times analysis calculated that over a lifetime, a medium-wage worker participating in a Bush-style privatization plan would retire with an account worth only a total $100,000. Even those who paid the maximum in payroll taxes would have only $140,000.
Today's Social Security has been enormously effective in reducing poverty among the elderly, protecting relatives of deceased workers and the disabled, and providing a reliable source of retirement income. Social Security's long-term ﬁnancing challenges can be met through relatively minor adjustments, which would enable future generations to count on a program that would serve them as well as it has today's retirees and generations before them.
The modest changes required to keep Social Security payments at the current rate, adjusted for inﬂation, lack the sex appeal of privatization. That may be because privatization proponents are telling only half the story. But isn't the truth the least one generation owes the next? Forget the accounting tricks. The bottom line is that we are -- and, one hopes, always will be -- in this together.
Richard C. Leone is president of The Century Foundation and co-editor of Beyond the Basics: Social Security Reform. Libby Perl is a program ofﬁcer at The Century Foundation.