Social Security is center stage in the presidential campaign, as it should be. The stakes are enormous. George W. Bush and some Democrats want to divert part of the program to individual retirement accounts. Al Gore would maintain the present system, but supplement it with government-subsidized personal accounts to help low- and middle-income families build financial wealth. Though it is rarely appreciated as such, the Social Security debate is substantially a debate about inequality.
In the past few years, researchers here and abroad have produced a new wave of evidence that relative inequality in income and wealth contributes to a variety of social pathologies. These effects seem to hold up despite absolute increases in income at all levels. We've known for a long time, of course, that the most advantaged segments of the population live longer and healthier lives. Today, a growing body of new social science research demonstrates the effects of inequality in a host of areas--a partial list includes criminal justice, health, mortality, housing, transportation, civic participation, and trust.
In this context, it is odd how little discussion there has been about the effects of a quarter-century of growing inequality on America's largest generation ever, the baby boomers. Yet the boomers have lived, essentially for all of their working years, through a period of growing gaps between the most well-off members of society and everyone else. Retired boomers will likely face even greater relative inequality than do the currently retired. So the growth of inequality should be central to the debate about Social Security, as should the retirement of the boomers.
Since the 1970s, the much-noted stagnation of most incomes (in inflation-adjusted dollars) has helped to produce substantially more inequality today than we have had for generations. Wealth distribution--an important factor in determining the personal contribution one can make to retirement--is even more skewed. Professor Edward Wolff of New York University has documented that the net worth of the top 1 percent of households rose to 40 percent of U.S. wealth in 1997, up from 34 percent in just 1983. Overall, the richest 10 percent of households have 73 percent of the nation's total wealth; one man, Bill Gates, has more than the bottom third.
Based upon the extreme inequality among boomers now, Social Security will remain our bedrock income security and antipoverty program for most retirees. Ironically, the projected gap in Social Security revenues is a direct consequence of the fact that real wages for a majority of Americans remained essentially static or declined since 1973, which meant depressed payroll tax contributions to Social Security trust funds. Had the income history of the past 25 years been different, with wages growing as they did from 1946 to 1973, there would be no Social Security funding problem at all.
Still, why worry? After all, this election year candidates are tripping over each other to reassure seniors that Social Security will be safe in their hands and to promise the next generation of retirees--the baby boomers--that it will be there when they need it. When you look behind the campaign slogans, however, there are critically important differences in the positions taken by presidential and congressional candidates on the issue.
In the first place, we need to worry about those in both parties who want to use the anticipated federal budget surpluses as an excuse to abandon present levels of guaranteed retirement support. In essence their approach substitutes individual accounts for the pooled-risk core of social insurance. George W. Bush's plan would slice off almost one-sixth of the program's revenue to set up private accounts. Since the mid-1990s, at least, such accounts have represented the Holy Grail of conservative and Wall Street plans to restructure the program. Think of all those stock market gains for average folk! Think of all that individual choice! Think of the joy of shrinking the role of government! And think of all those fat brokerage and money management fees, with maybe a teensy ongoing need for congressional action! It's enough to make fundraisers in both parties salivate.
But with accounts controlled by individuals, even small differences in trading strategies and management fees can make a large difference in the ultimate value of a portfolio developed over a period of many years. And the timing of retirement can drastically affect the relative value of an account. A recent study examined what would have happened had a Bush-type privatization program been in effect from 1947 to 1981 (an era of poor stock market performance). A worker retiring in 1981 would have received benefits 37 percent lower than under the current Social Security program. An identical worker who participated in a Bush-type plan from 1965 until the present, however, would not have experienced much of a difference from what current law provides. Timing may not be everything, but it can literally be the difference between poverty and comfort in old age.
Only the top 10 percent of those at the verge of retirement can really afford instability in their Social Security wealth. For everyone else, Social Security is very important. For the bottom quarter of the population, the Social Security entitlement represents more than 75 percent of their entire wealth. For the next quarter of the population, Social Security is, in effect, half their wealth, and even for the third quartile, it is a third.
Despite the promise of privatizers that all can be rich, that just isn't how capitalism works. Indeed, it works in part because it doesn't produce equal results. Since individual accounts must, in the nature of the case, produce widely unequal results (and all empirical studies show this is true of private investing), the introduction of such accounts would only exacerbate inequality.
Under these circumstances, Social Security remains not only our best antipoverty program; it also is the best bet we have for dealing with inequality among older Americans. We need it now, and boomers will need it even more in the future. ¤