Social Security Blues Based on False Alarm

A poll, which may be apocryphal, found that young adults are more likely to believe in UFOs than in their chances of receiving a Social Security pension.

Sam Beard holds that those in their 20s have good reason for such doubts. He sees the Social Security system facing a "crisis" in the next century when the baby boomers retire. "We have to save the security in Social Security," the activist says.

But economist Dean Baker sees no crisis, though he admits Social Security will face some problems as the population ages. In fact, today's young workers should get bigger pensions than today's retirees, because real wages will be much higher, he says.

Mr. Beard is chairman of Economic Security 2000, a new non-partisan political organization "devoted to restoring America's promises by strengthening and saving Social Security while creating a nation of savers." He has raised $600,000 so far from a diverse group of businesspeople, some of them well-known, and others, to finance a campaign to rescue and "reform" the pension system. He is going on a 50-city tour to promote his plan and setting up a national headquarters in Washington.

As founder and chairman of the Delaware-based National Development Council, Beard is an old hand at raising money. Council programs, over 25 years, have resulted in more than $25 billion of investment in poor urban and rural communities in 50 states. He is much concerned today about the growing division between rich and poor, and holds that his plan for investing some portion of an individual's Social Security contributions in an account investing in the private market (bonds, stocks, etc.) would provide retirees with income from capital - the primary income source for most of those who are wealthy.

His basic thesis is familiar: When the baby boomers retire in the next century, the essentially pay-as-you-go Social Security system will run out of money as now set up. Today, three workers support each recipient of pensions or disability payments. By 2033, each recipient will be supported by only 1.8 workers. Social Security taxes will have to rise 50 percent or benefits be cut by 30 percent to make the system work.

To Mr. Baker of the Economic Policy Institute, a liberal think tank in Washington, such numbers are alarmist.

"Social Security is sound now and will continue to be sound indefinitely," he maintains. "The major threat to the system comes from the proposals to fix it" - including privatization schemes.

His calculation is that, under the middle actuarial assumptions of the Social Security trustees, the payroll tax supporting pensions would have to rise only 1/10th of a percentage point a year from 2010 to 2046 to keep the system intact indefinitely. That would total 3.6 percentage points. At present, the combined tax on employees and employers totals 12.4 percent for the pension and disability system alone, plus 2.9 percent for Medicare.

This increase wouldn't necessarily boost the entire tax burden for two related reasons, Baker says. One is that productivity should continue to rise a modest 1 percent a year (slightly less than it has in recent years), boosting real wages on average by 35 percent by 2030. Even with somewhat higher Social Security taxes, workers will have far higher living standards than today. Since pension payments are based on wages earned while working, pensioners will also be better off in the next century.

The second factor is that working people may have to support more retirees, but fewer children. The dependency ratio (the ratio of workers to both children under 20 and retirees) is 10 to 7.1 now. It will fall to 10 to 6.6 in 2012. After that it will rise to 10 to 8 in the 2035 to 2060 period, still below the 10 to 8.4 level in 1960, when some of the baby boomers were being born.

So taxpayers in 2035 would pay more taxes on their hefty wages to support retirees, but perhaps less in taxes to pay for education and other costs of children. Baker puts the average annual wage at $60,600 in 2030 and $98,210 in 2050, compared with $25,260 today. (Those numbers are in today's dollars, using estimates of the Boskin commission, appointed by the Senate Finance Committee to evaluate the accuracy of the consumer price index.) Thus Baker sees "little reason" to suppose that dependents will be "an unsustainable burden" for today's 20-year-olds.

The Clinton administration's Advisory Council on Social Security will report by the end of July, a staff member says. Baker predicts it will offer some assurances on Social Security's security.