Social Security–Still Adrift

To the Point by Jack Bobo

I guess my worries over what the 16-member blue ribbon commission might do to Social Security were somewhat in vain. It appears that after months of deliberation the commission brought forth not a solution, but three non-plans for Congress to consider.

It is also becoming more and more apparent that the widely acclaimed idea of privatizing a part of Social Security is losing its appeal as reality beings to set in. To use an expression popularized by Alan Press, “There is no right way to do a wrong thing.”

One of the major stumbling blocks to making a change from the present system to one that provides funded and vested accounts is the transitional cost. A distinguished professor from M.I.T. speaking on a major TV program observed that there is no money to accomplish this. He noted that you cant borrow the money from the Social Security system for it has none to loan.

The U.S. Treasury is in a similar bind and, therefore, cannot make the cash infusion needed. The recession and the war on terrorism all but eliminate this as a possibility. Thus, the only source of funds would be the American people. We borrow from ourselves to provide benefits that will likely be used to repay the loans.

In a sort of simplistic way, it is like the fellow who is tired of paying term insurance premiums and would like to convert to variable lifebut he doesnt have the money to do so. Using the commissions logic, all he has to do is find someone willing to lend him the money to execute the conversion, and he can repay the loan with interest later. A lender would have to question whether this was Social Security or social speculation.

This, of course, raises the question of the risks involved in non-guaranteed funding. The idea of assuming or sharing risks grew popular in the 90s when the perils associated with investment risk were largely masked by logarithmic portrayals of the performance of mutual funds. The whole idea was not only deemed acceptable, but exciting as well.

The proliferation of 401(k)s, many of them replacing defined benefit pension plans, was an obvious and direct manifestation of our love affair with the stock market. But today, one does not have to read many publications to find articles detailing the growing disaffection among workers with their 401(k) plans.

A lead article in the Dec. 24, 2001 issue of U.S. News and World Reports entitled, “The 401(k) Stumbles,” points out that only 75% of eligible workers now participate in a 401(k) as compared to 79% in 1997. The article also states that the average workers account balances fell from nearly $47,000 in 1999 to $42,000 in 2000.

The $1.8 trillion presently in 401(k) plans provided much of the fuel that propelled stock prices to their record highs in the 90s. A number of major employers including Ford, Daimler Chrysler, Bethlehem Steel, Visteon and Wyndham Hotels, and a host of smaller companies, have suspended matching contributions to their 401(k) plans, according to the article.

As the fuel for market expansion declines, opportunities for growth in stock prices will diminish. No wonder employees are starting to look favorably upon guaranteed benefits.

Despite two consecutive down years on the stock market, there are still those who advocate stocks as the long-term solution to Social Securitys viability. In an interview in the monthly bulletin published by the American Association of Retired Persons (AARP), a prominent U.S. Senator expressed the belief that we should not make a judgment based upon one year of market returns. He went on to say: “Theres never been a 20-year period when weve had a negative return.”

That may be true, but it is also true that following a nosedive, the market took 22 years to return permanently to the level before it tanked. Obviously, there had to be many positive years for this to happen, but in the aggregate we just marked time. Or as Benjamin Franklin put it: “A half-truth can be a great lie.”

Also, not everyone agrees with this Senator, as critics point out that the commission failed in its charge to restore financial integrity to the system, since all three proposals fall short of that, or else entail significant reductions in guaranteed basic benefits.

Coming back to the three plans, the M.I.T. professor also stated that the commission did not even address the impact the plans would have on other Social Security provisions such as survivor benefits.

One may be able to do a certain amount of planning and timing in a separate account with respect to retirement, a date that is fairly easy to target. But how do you time your investments for an untimely death of the breadwinner? Growth stocks may be fine for retirement 30 years hencebut if growth is slow, a surviving family may be shortchanged.

So far as everything I have read indicates, everyone agrees there is no easy or “pain free” way to stabilize the Social Security System. However, there are two steps that could be taken that would ease the strain substantially. Age 65 is an out-of-date age for retirement given todays longevity (I retired at 69). Raise the normal retirement age to 68.

Also, the present cost of living increases for current retirees exceeds changes in cost of living for people retired. This could be cut in half. Taken together, these two proposals spread the “pain” among both present and future beneficiaries, as it should.

I am all for expanding opportunities and encouraging people to save for retirement in accounts above and beyond Social Security and in whatever medium they choose. With all its problems, our system is still the best in the world. Lets keep it that way.


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 14, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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