Save SociaI Secuvil Jvon Ils Saviovs

AulIov|s) BoIevl Eisnev

Souvce JouvnaI oJ Fosl Kenesian Econonics, VoI. 21, No. 1 |Aulunn, 1998), pp. 77-92
FuIIisIed I M.E. Sharpe, Inc.
SlaIIe UBL http://www.jstor.org/stable/4538614 .
Accessed 17/10/2011 1139
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .
http://www.jstor.org/page/info/about/policies/terms.jsp
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.
M.E. Sharpe, Inc. is collaborating with JSTOR to digitize, preserve and extend access to Journal of Post
Keynesian Economics.
http://www.jstor.org
ROBERT EISNER
Save Social
Security
from its saviors
Social
Security
faces no crisis now or in the future. It will not
"go
bankrupt."
It will "be
there,"
not
only
for those of us now
enjoying
it or
looking
forward to it in the near
future,
but for the
baby
boomers and
the "Generation Xers"
following
them. All this is true as
long
as those
who would nibble
away
at Social
Security
or
destroy
it in the name of
"privatization" do not have their
political way.
But
they very likely
will
not,
since the
elderly-and
their
children-vote,
and will vote
sensibly
as the full
implications
of the issue become
apparent.
The
dangers
The
proposed nibbling away
of Social
Security, including
that
by
some
of its
presumed
friends,
is
disingenuous
and
misleading.
Even some of
its defenders seem all too
ready
to
accept
"minor" cuts in benefits to
achieve
prospective
fund balance.
Raising
"the retirement
age
"
One of the more insidious and drastic "solutions" is to increase
further the "Normal Retirement
Age"
or "NRA" of
65,
already
slated
to rise
gradually
in future
years
to 67.
Actually,
this has
nothing
to
do with
encouraging people
to work
longer. They already
have that
encouragement
since benefits increase if those over 65 work
longer,
up
to the
age
of
70,
and are less if
they
retire
earlier,
down to the
age
of 62.
Currently,
retirement at 65
provides
benefits
equal
to 100
percent
of the
"Primary
Insurance
Amount,"
or
PIA;
6
percentage
points
are added for each
year
retirement is
delayed, up
to
age
70,
at
which
point, therefore,
annual benefits would be 130
percent
of those
The author is William R. Kenan Professor Emeritus of Economics at Northwestern
University, Evanston,
Illinois. Parts of this
paper
have been
adapted
from the
author's Social
Security:
More,
Not
Less,
a
Century
Foundation/Twentieth
Century
Fund
Report,
New
York, 1998,
and from his articles of December
10,
1997 and Feb-
ruary 17,
1998 in The Wall Street Journal. It is
being published
as well in the Sum-
mer 1998 issue of the Milken Institute's Jobs and
Capital.
Journal
of
Post
Keynesian
Economics / Fall
1998,
Vol.
21,
No. 1 77

1998 M.E.
Sharpe,
Inc.
0160-3477 / 1998 $9.50
+
0.00.
78 JOURNAL OF POST KEYNESIAN ECONOMICS
that would have been received if retirement were at age 65.1
Early retirement, at age 62, by contrast, results in annual benefits only
80 percent of those at the NRA of 65. A higher NRA would merely
lower the entire scale of benefits. If, for example, the age were raised to
70, those retiring then would get the same annual benefits they now
receive at age 65, that is, some 23 percent less than they receive currently
at age 70. Assuming the reductions are proportionate, those retiring at
65 would then receive only 77 percent of their current benefits. And those
retiring at age 62 would get still less, 61.5 percent instead of 80 percent of
the benefits they now receive at age 65, as illustrated in Table 1.2
Cutting the cost-of-living adjustment
Another proposal that would cut Social Security much more than is
usually acknowledged relates to arguments that the Consumer Price
Index is overstating inflation. The post-retirement Social Security cost-
of-living adjustments should be reduced, we are told, to correspond to
a new, corrected CPI. Senators Bob Kerrey and Patrick Moynihan have
incorporated such a recommendation, along with raising the normal retire-
ment age, in their proposal for partial privatization. The widely proposed
1 percent per year correction3 would add up: 1 percent the first year, 2
percent the next, 5 percent in the fifth year, 10.3 percent in the tenth year,
and 21.7 percent in the twentieth year, as shown in Table 2. It would result
in reducing benefits, as against those calculated by the old measure, by
more than 10 percent over the average twenty-year retirement period.
I would go the other way and end the squabble about the cost-of-living
adjustment by indexing benefits to wages rather than prices. Retirees
would share in growing productivity and rising real wages of those
working but would share in any sacrifice if higher prices of imports,
such as those in the past due to drastic increases in oil prices, leave us
all with less output for domestic use.
1
See "1998 Annual Report of the Board of Trustees of the Federal Old-Age and
Survivors Insurance and Disability Trust Funds," hereafter referred to as 1998
OASDI Trustees Report, Table LI.E4.
2
If one really wanted to encourage people to work longer, one should rather re-
move the penalty of loss of Social Security benefits for wages earned from the ages
of 65 to 69 and also remove the special tax on Social Security benefits for those
whose earnings drive their incomes above fairly modest upper cut-off points.
3
The "best estimate of the size of the upward bias" in the CPI inflation rate was 1 .1
percent, according to the Senate Finance Committee's Advisory Commission to
Study the Consumer Price Index ("The Boskin Commission"), Toward A More Accu-
rate Measure of the Cost of Living, December 4, 1996, p. ii.
SA VE SOCIAL SECURITY FROM ITS SA VIORS 79
Table 1
Raising normal retirement age from 65 to 70: effect on benefits or
primary insurance amount (PIA)
Year of retirement 62 65 66 67 70
Current benefits as percentage of PIA 80 100 106 112 130
New benefits as percentage of PIA 61.5 76.9 81.6 86.2 100
Percentage loss in benefits 23.1 23.1 23.1 23.1 23.1
This would mean that retirees would share in the gains-and occa-
sional losses-of their working sons and daughters. With real wages
ultimately rising by 0.9 percent per year by the old measure, as forecast
in the widely cited "Intermediate Cost" projections of the 1998 OASDI
(Old Age and Survivors Insurance and Disability Insurance) Trust
Funds Report,4 shifting the adjustment after retirement from prices to
wages would increase benefits by that amount, or some 10 percent over
the life of the average retiree.
Means testing
Some, like Pete Peterson and his Concord Coalition, urge "means
testing," suggesting that the rich-and indeed the only moderately well
off-be denied some or all of the benefits currently provided. Peterson
and others of the super-rich say that they would gladly give up what they
get to help save the system.
But this kind of generosity is more likely to kill it. As far as Social
Security goes, upper-income groups already receive an amount rela-
tively much less in comparison to their earnings-and their payroll
taxes than do the poor. The formula is stacked so that monthly benefits
equal the total of 90 percent of the first $477 of "Average Indexed
Monthly Earnings" (AIME), 32 percent
of the amount between $477
and $2,875, and only 15 percent of the amount in excess of $2,875.5
Further reduction of benefits for the middle class and those at the top
would convey the notion that Social Security is just for the poor, another
form of "welfare." This would go a long way to destroy the political
support for this almost universal and probably most popular and most
successful economic program in our history.
4
See 1998 OASDI Trustees Report, Table II.D1.
S See 1998 OASDI Trustees Report, section II.E, Automatic Adjustments.
80 JOURNAL OF POST KEYNESIAN ECONOMICS
Table 2
Cutting the cost-of-living adjustment by 1 percentage point, from 2.5
percent to 1.5 percent
Year 1 2 5 10 20
Percentage loss in benefits 1.0 2.0 5.0 10.3 21.7
Privatization
Some would solve the presumed problems of Social Security by replac-
ing it, in whole or in part, with private investment in a booming stock
market. This is like advising us to forego our life insurance or health
insurance premiums and turn them over to our brokers. If we could be
sure that we will not need expensive medical care or that we will not die
early and leave destitute dependents, that scheme might work out. But
how many would consider this wise?
It is a fine idea, for those who can, to invest in addition to contributing
to Social Security, and millions of Americans do. What those who would
diminish Social Security in order to "privatize" do not tell us is that
private investment, whether directly or in 401(k)s, 403(b)s, IRAs, or
Keogh plans, whatever its advantages, does not provide what Social
Security has offered for six decades: (1) social insurance to protect all,
including those who are born into adversity or suffer it along the way;
(2) actuarially fair annuities at retirement; (3) automatic cost-of-living
adjustments to protect against inflation; and (4) the most efficient
insurance system to be found, with administrative costs for over 140
million participants running at about 0.8 percent of benefits.
The myths
The trustfunds going bankrupt
The notion that Social Security faces bankruptcy begins with a funda-
mental misconception, that payment of benefits somehow depends upon
the OASDI (Old Age and Survivors and Disability Insurance) trust
fumds. The trust funds are merely accounting entities.6 Our payroll taxes
6
Barry Anderson, the top civil servant in the White House's Office of Management
Budget, who has just retired after twenty-seven years of service, writes me, "You are
absolutely correct on this point," and adds, "very few if any of the academics or ana-
lysts who comment on Social Security have the guts (or perhaps knowledge) to recog-
nize this fundamental fact."
SAVE SOCIAL SECURITY FROM ITS SAVIORS 81
or "contributions" go directly to the United States Treasury. Our benefit
checks come from the Treasury-and those receiving them can verify
on those checks that the payer is the Treasury of the United States, and
not any trust fund.
Social Security payments are an obligation under law of the U.S.
government. Our government and its Treasury will not, indeed cannot,
go bankrupt. As Federal Reserve Chairman Alan Greenspan has re-
cently put it, "[A] government cannot become insolvent with respect to
obligations in its own currency."7
Expenditures alleged to be related to trust funds are often less than their
income-witness the highway and airport funds as well Social Security.
There is no particular reason they cannot be more. The accountants can
just as well declare the bottom line of the funds' accounts negative as
positive-and the Treasury can go on making whatever outlays are pre-
scribed by law. The Treasury can pay out all that Social Security provides
while the accountants declare the funds more and more in the red.
For those concerned, nevertheless, about the "solvency" of the trust
funds, there are simple, painless remedies for this accounting problem.
The "Intermediate Cost" projections in the 1998 Trustees Report indi-
cated that the combined Old Age and Survivors Insurance and Disability
Insurance (OASDI) trust fund balances would be down to zero in the
year 2032, as indicated in figure 1 and Table 3. At that point, the
projected intake of the funds would be only about three-quarters of the
committed payouts.
This indicates a three-year delay in "insolvency" from the projected
2029 date in the 1997 Trustees Report. Further delay would follow from
incorporation of the adjustments to the Consumer Price Index already
instituted by the Bureau of Labor Statistics.
But some of the economic assumptions underlying those widely cited
Intermediate Cost projections already appear wide of the mark. Real
GDP growth, for example, is put around 2.0 percent annually from
1998 to 2007 (and projected to 1.2 percent over the ensuing years).
Actual 1997 growth was 3.7 percent, though, and was reported at an
annual rate of 4.3 percent in the first quarter of 1998. The usually
conservative forecast of the Congressional Budget Office (CBO)8 has put
7
In Maintaining Financial Stability in a Global Economy, Federal Reserve Bank of
Kansas City, 1997, p. 2.
8
"The Economic and Budget Outlook for Fiscal Years 1999-2008: A Preliminary
Report," January 7, 1998.
82 JOURNAL OF POST KEYNESIAN ECONOMICS
Figure 1 Estimated trust fund ratios for OASI and DI trust fimds combined,
by alternative, calendar years 1985-2075, assets as a percentage of annual
expenditures
8009%,,,---. -
I Lw os, , . Inemeit Cos , .I = ihCs
Source 19Anul Reotolh or of Trste of th FdrlOl-g
500% ...^.., .^ ..,__4____, *
Historical Estirnated5
400%
-
. ( . , 4. ....
p. 128' ,
300Y.% .,./ \....,.. ...' .
200 # %
-............ .'
100# ..> . _ .
0%
1985 19p 5 2005 2015 2025 2035 204 2055 2065 2075
Carendar year
I =Low Cost,
11 =Intermediate Cost,
III
=
High
Cost
Source: 1998 Annual
Report
ofthe Board of Thrstees ofthe Federal
Old-Age
and Survivors Insurance and
Disability
Insurance Tast
Funds, figure I.F6,
p.
128
it at 2.7
percent
in fiscal 1998.
Unemploy9ent,
which
averaged
4.9 percent in 1997 and has been under
6 percent for over three
years,
is nevertheless forecast to rise to 6.0
percent by
2008 and
stay
at that level thereafter. The Trustees' interme-
diate forecasts
put
the
growth
in the labor force at l.0
percent
and 0.9
percent
over the next four
years;
the twelve-month
growth
from De-
cember 1996 to December 1997 was
actually
1.9
percent. They put
the
CPI inflation rate at 3.5
percent
over most of their
long-run
forecast
period, while current inflation rates are running below 2 percent.
Altering the economic assumptions to fit developing reality would gen-
erally increase forecast fund balances.
The Low-Cost projections, which indicate the funds will be solvent
indefinitely, take a less gloomy view of the U.S. economy. They put
GDP growth at 3.1 percent in 1998, about 2.4 percent to 2007, and
then declining only to 2.2 percent thereafter. Inflation comes in at 2.2
percent instead of 3.5 percent in later years and unemployment at
5 percent instead of 6 percent. The growth in the labor force slows
SAVE SOCIAL SECURITY FROM ITS SAVIORS 83
Table 3
Intermediate and low-cost projections of OASDI current surpluses
and balances, billions of dollars*
Intermediate cost projections Low-cost projections
Fund balance at Current surplus Fund balance at Current surplus
beginning of (net increase in beginning of (net increase in
Year year fund balance) year fund balance)
1998 $655.5 $101.4 $655.5 $104.0
1999 756.9 107.5 759.5 116.6
2000 864.4 113.7 876.1 126.7
2001 978.1 120.2 1,002.8 140.2
2002 1,098.3 126.3 1,143.0 152.2
2003 1,224.6 132.8 1,295.2 165.8
2004 1,357.4 139.8 1,461.0 179.8
2005 1,497.2 147.8 1,640.8 195.7
2010 2,310.8 180.1 2,791.0 279.5
2015 3,199.8 155.1 4,315.9 331.7
2020 3,755.4 21.4 5,981.5 326.5
2025 3,425.3 -225.8 7,563.7 293.8
2030 1,582.7 -601.9 8,944.4 259.5
2040 Exhausted** Negative 11,787.5 374.4
2050 - Negative 16,841.4 679.8
2060 Negative 25,111.5 1,042.3
2070 - Negative 38,574.0 1,797.0
2075 Negative 48,538.0 2,296.1
*
Derived from 1998 Annual Report of the Board of Trustees of the Federal Old-Age
and Survivors Insurance and Disability Insurance Trust Funds, Table III.B3,
p. 179.
**
Estimated to be exhausted in 2032.
to only 0.6 percent instead of 0.1 percent.9
The whole problem, though, is trivial. That projected shortage in the
trust funds in thirty-four years-aside from the uncertainty of any such
long-run projections-is purely a matter of accounting, with any number
of easy accounting solutions. Credits to the trust funds come from a 12.4
percent tax on payrolls, the interest the Treasury awards on the trust fund
balances, currently well over $600 billion, and some taxes on benefits.
But it was not God but Congress that decreed that only the 12.4 percent
payroll taxes be credited to the funds. If we also dedicated some 1.5
9
Trustees' assumptions indicated in 1998 OASDI Trustees Report, section II.D1,
Economic Assumptions.
84 JOURNAL OF POST KEYNESIAN ECONOMICS
percent of taxable income from our income taxes, we would handle all
of the (pessimistically) projected shortfall.
It may be added that, with apparently increasing proportions of
non-wage income, it makes more sense than ever to finance Social
Security, if it is to have a dedicated tax, with a portion of income
taxes. We could drop all of the 12.4 percent tax on payrolls and
substitute an increase of about 8.3 percentage points in the average
taxation of individual and corporate income, specifically dedicated,
as are payroll taxes now, to the Social Security trust funds. It is
appropriate for those who earn income without working, as well as
for those who earn from working, both to contribute and to receive
benefits from Social Security.10
And it was not God but Congress and the Treasury that determined the
interest rate to be credited on the non-negotiable Treasury notes of the
fund balances. I might tum one of the arguments of those who would
privatize Social Security, telling us that returns would be far greater if
workers could take some or all of their Social Security "contributions"
and invest them in the stock market. Again, as Alan Greenspan, along
with others, has pointed out, this would merely change the identity of
those who hold government bonds as against stocks, with little or no real
effect on the economy. Our payroll tax "contributions" currently go
right into the Treasury, just like all our other tax payments. If, instead,
they are used to buy stock, the Treasury will have to borrow to replace
those lost revenues. It would be essentially selling government secu-
rities to those who sold their stock to those who had previously been
making payments to the Treasury. This would increase the debt held
by the public and reduce our developing budget surplus or add to any
deficit.
Why not save workers the often daunting problem of finding private
investments? Recent surveys show that a large majority of Americans,
who do not read the Wall Street Journal or follow "Market Wrap" on
CNBC, have not the foggiest idea of how to invest. Most cannot even
10
In response to concerns about Social Security, real and imagined, there has been a
substantial agitation for "reform." I would reform Social Security to adjust some of
the benefits and taxes in the direction of greater equity and efficiency. The payroll
tax is focused particularly on labor, has no progressivity whatsoever, and has an
upper cut-off point, $68,400 in 1998. With use of a dedicated portion of the income
tax, we might then offer benefits to all who contribute, including those whose in-
come taxes have been based on capital income rather than labor income. There is no
reason why all should not receive retirement insurance regardless of the sources of
their income and contributions.
SAVE SOCIAL SECURITY FROM ITS SAVIORS 85
tell the difference between stocks and bonds or know that money market
funds contain neither. Does it make sense to take some (or all) of their
Social Security to offer them the chance to gamble in a game for which
they do not know the rules?
If we want Social Security to share in whatever earnings investors
are receiving, why not award balances in the Trust funds, instead of
the current 5.9 percent interest rate on long-term government bonds,
the higher returns that might be earned in equity investment? Barry
Anderson, as indicated above of the Office of Management and
Budget, has calculated that crediting the balances with a 10.4 percent
interest rate, which is close to the long-run return on stocks, would
keep the funds in balance indefinitely, on the basis even of those
pessimistic "intermediate" projections. This would again be merely
a matter of accounting, with no real effect on the measured budget
deficit, the federal debt held by the public, or the economy. But it
would solve that presumed problem of a future shortage in the Trust
funds. Then, if we really cared about the welfare of Social Security
contributors, we would increase their benefits to match these higher
earnings.
The fears and cynicism regarding Social Security, misguided as they
are, though, should be met as fully as possible. Here is a way to do it
and truly, in President Clinton's words, "Save Social Security first."
It is immediate, effective, and painless! And it will entail no cuts
in benefits, no new taxes, and no use of the developing budget
surplus.
1. Convert all of the balances of nonmarketable Treasury securities
currently in the funds' accounts, now over $600 billion, into
marketable Treasury securities, guaranteed like all others by the
full faith and credit of the United States government. Set the
interest rate on these securities at 10.4 percent, sufficient to
guarantee long-run solvency according to the Intermediate-Cost
projections, and not inappropriate in view of past long-run market
returns on equity.
2. Have the trust funds make all payments to beneficiaries and
receive all revenues currently credited to them. These would
include the interest on their existing balances. The funds' assets
of marketable securities would continue to grow as long as funds'
incomes exceed their outlays.
3. Have the trust funds sell securities to meet any cash shortfall if,
86 JOURNAL OF POST KEYNESIAN ECONOMICS
or whenever, income becomes less than outgo. According to those
Intermediate-Cost projections, this would begin to become neces-
sary in 2019, when the funds' balances would be $2.9 trillion.
The "money's worth" issue
A second bit of nonsense about Social Security is that beneficiaries will
not be getting their "money's worth" for their contributions. This
conclusion stems from calculating the payroll taxes put in by contribu-
tors and relating these to their ultimate benefits. But this is not a
meaningful comparison to begin with, and frequently it is not even done
right. The measure of benefits should properly include not merely retire-
ment but disability and survivor payments. The disability insurance in
Social Security has been estimated to be equivalent to $207,000 worth
of disability insurance that might be purchased in the private sector. And
a comparable dependent-and-survivor policy for a twenty-seven-year-
old average wage worker with two small children would cost
$307,000.12
But all payroll taxes, regardless of where the accountants credit them, go
into the general Treasury pot, along with all other government revenues,
and all benefits, along with all otherpayments, come out ofthat same pot. 13
I I
If, perversely, the rate on the securities given to the funds is set at only the current
long-term rate of about 6 percent, have the Treasury begin to issue additional market-
able securities to the funds now, to meet the prospective shortfall in 2032, when there
would no longer be securities left to sell. These additional securities would guarantee
the funds all of the income they need.
By the estimates of the Trustees, in their 1998 report, the entire shortfall for the next
seventy-five years cati be met with an increase of annual revenues equal to 2.19 per-
cent of taxable payrolls. Beginning in 1998, that amount in 1998 would come to
about $75 billion. But this $75 billion more in the trust funds need not-and should
not-come from additional taxes. Rather, the Treasury would simply issue additional
marketable securities to the funds. Each year in the future, as the Trustees' forecasts
may change, appropriate amounts of additional securities can be given.
Indeed, we could go further and precommit all that might be needed on the basis of
current forecasts. At the current 5.9 percent interest rate on long-term Treasury bonds
and the funds' projected growth in taxable payrolls, the required income would be
provided by roughly $3.8 trillion of additional marketable securities. This would pro-
vide solvency at least to the year 2075, as far ahead as the funds project. In fact, it
would involve no real change but would merely convert what is now an implicit Trea-
sury obligation, listed in the books under "contingent liabilities," into an explicit debt.
12
Report
of the 1994-1996 Advisory Council on Social Security, vol. I (Washing-
ton, DC: U.S. Government Printing Office, 1997), p. 89.
13
See Robert Eisner, "Whatever You Call It, a Tax Goes to the Treasury," Wall
Street Journal, July 29, 1997, editorial page.
SAVESOCIALSECURITYFROMITSSAVIORS 87
Relating benefits to payroll taxes alone is thus a meaningless calculation.
One might properly undertake the complex task of relating all of what
each American receives from government to all that he or she gives.
This would include police and defense and education and health services
along with interest payments on the debt, and Social Security and other
"transfer payments." If one apportioned national defense outlays on the
basis of the wealth and property being "defended," one might indeed
get some surprising results, showing that, while the wealthy do pay more
in taxes, they also get much more in the way of government services.
The wealthy and many in the upper middle class may well complain
that they are not getting that much out of Social Security. If they could
have back their payroll tax contributions and invest them in the stock
market, even aside from the boom of the past several years, some of
them argue, they would be better off.
But Social Security was not meant to be a get-rich scheme or a
competitor to go-go funds. It is social insurance. It is meant to provide
at least minimum support for all, regardless of initial station or life's
vicissitudes. Those who have good fortune will be able to say in
hindsight that they did not need it, just like the individual who buys
insurance on his house and never has it burn down, or the one who buys
life insurance to benefit a young spouse and children and then lives to
ninety.
The burden of the aging baby boomers
There is a third, in this case real, issue regarding the impact on Social
Security of our aging generation of baby boomers. The ratio of the
population of retirement age-65 and over-to those of working age-
20 to 64-will be growing. In this regard we are told that there are now
almost five people of working age-20 to 64-for every potential
dependent aged 65 and over, and by the year 2030 that ratio will fall to
less than three.
The relevant numbers, though, relate to all potential dependents, the
young-under 20 years of age-as well as the old. In 1995, for every
1,000 people of working age, there were 708 young and old potential
dependents. The intermediate projection puts the number in the year
2030 at 788.14 This means that those 1,000 people of working age would
have to support 1,788 people-themselves and their dependents-in-
stead of 1,708, a 4.68 percent increase in their burden.
14
1998 OASDI Annual Report, Table II.H1, p. 145.
88 JOURNAL OF POST KEYNESIAN ECONOMICS
But if productivity per worker grows at a modest 1 percent per year,
well within historical experience, the growth in total output per
worker will come to over 37 percent between now and the year
2030. This would increase income per capita by 31 percent, ample
to improve vastly the lot of all-the elderly, the young, and those in
their working prime.
An increase in the aged dependency ratio-putting aside for the
moment a decrease in the under-20 dependency ratio-will require
those in the 20-to-64 age group, presumably the working population, to
devote a greater share of their increasing incomes to supporting those
65 and over. But this support must be current. While we can save and
invest now in more ovens that will be useful in the future, the bread
dependents eat at any time must be baked by those working then.
Retirees cannot eat balances in Social Security trust funds, or stocks and
bonds or cash. In a real sense, for the economy as a whole, retirement
benefits are thus always supplied on a pay-as-you-go basis.
That is why it makes perfect sense to finance Social Security on a
pay-as-you-go basis, raising taxes on the working population to finance
benefits for increasing proportions of aged as those increases occur. But
then it must be recognized that this relative aging about which there has
been so much comment is still much in the future. The aged dependency
ratio, at 21.4 percent in 1995, according to the intermediate forecast of
the Social Security Fund Trustees, will actually decline to 21.1 percent
in 2000 and to 20.7 percent in 2005 before finally returning to 21.4
percent in 2010. Changes in the ratio hence indicate no need whatsoever
to raise taxes or cut benefits to the elderly over the next thirteen years.
If there is a problem with rising dependency ratios, it is not a short-run
or even an intermediate-run problem.
What proportions of increasing incomes and output must go to support
increasing proportions of elderly when those proportions do increase--
assuming we want to maintain both the working and the elderly popu-
lations in the same relative position? With an elderly dependency ratio
of 0.214 in 1995, each 1,000 people of working age had to support
1,214-themselves and 214 elderly. If the dependency ratio rises to
0.239 in the year 2015, as is forecast, each 1,000 people of working age
will have to support 1,239 people, again including themselves and the
elderly.15 Their burden will thus have increased by roughly 2 percent.
It follows, then, that if the proportions of the population aged 20 to 64
15
Aged dependency ratios from 1998 OASDI Trustees Report, Table II.Hl.
SA VE SOCIAL SECURITY FROM ITS SA VIORS 89
who are working remains constant, the real per-capita incomes of both
the working population and the elderly will be reduced by 2 percent from
what they would have been if the elderly dependency ratio had not risen.
This may be accomplished by increasing total taxes by 2 percent of our
incomes. In 2032, the year ofthe alleged apocalypse when the trust funds
will no longer be able to finance all currently legislated benefits, net
incomes per capita will have to be some 10 percent less.
But these cuts in net income per capita are all relative. Again, if the
average income per worker, in conformity to growth in productivity,
increases at even a very modest 1 percent a year, the reductions in net
income per capita will still permit everybody-the young, the working
population, and the aged-to enjoy higher absolute incomes and be far
better off than today. In 2032, income per worker would be 40 percent
more and per-capita income would be some 27 percent more. There is
no reason why retirees should not be permitted to share, at least propor-
tionately, in these gains.
Table 4 presents these relationships in terms of the Trustee Report's
projections of beneficiaries per covered worker. They indicate a greater
increase in the burden for covered workers. First, the projections have
labor force participation declining and unemployment increasing, re-
ducing the ratio of covered workers to the total population aged 24 to
65. Second, beneficiary rates for disability insurance are projected to
increase. Despite the greater increases in the beneficiary burden per
covered worker, income per capita will still rise substantially. By 2030,
again projecting a 1 percent increase per annum in income per worker,
as shown in Table 4, income per capita will be 20 percent more than in
1998. By 2035 it will be 25 percent higher. There would thus be no
reason for the elderly to receive less at that time. Rather, all-the elderly,
the middle-aged, young adults, and children-could enjoy total incomes
after taxes one-quarter more than now!
Not just saving Social Security-making it better!
The legitimate concerns of millions of Americans that their retirement
income may not prove adequate can be met by adding to Social Security,
not cutting it or substitutingthe vagaries and-for most-the confusions
and costs of private investment. I have proposed adding to the Social
Security system a program of voluntary additional contributions.
Privatizers do have a point though. Average Social Security benefits
are too low, coming now to only about $10,000 for a family with a retired
90 JOURNAL OF POST KEYNESIAN ECONOMICS
Table 4
Increasing aged dependency ratio: beneficiaries per covered worker
and net incomes per capita
Percentage
change in net
Burden per income per Percentage
covered capita increase in
Beneficiaries worker (100 because of net income Percentage
per 100 plus increase in per worker net change in
covered beneficiaries) beneficiaries from 1% per income per
Year workers as % of 1998 per worker annum growth capita
1998 29.78 129.78 0.00 0.00 0.00
2000 30.10 130.10 -0.25 2.01 1.76
2005 31.40 131.40 -1.23 7.21 5.90
2010 33.61 133.61 -2.87 12.68 9.45
2015 37.14 137.14 -5.37 18.43 12.08
2020 41.54 141.54 4.31 24.47 14.13
2025 45.82 145.82 -11.00 30.82 16.43
2030 48.88 148.88 -12.83 37.49 19.86
2035 50.23 150.23 -13.61 44.51 24.84
2040 50.37 150.37 -13.69 51.88 31.08
2050 51.25 151.25 -14.19 67.77 43.96
2060 53.53 153.53 -15.47 85.32 56.65
2070 55.08 155.08 -16.31 104.71 71.32
2075 55.84 155.84 -16.72 115.15 79.18
*
From 1998 Annual Report of the Board of Trustees of the Federal Old-Age and
Survivors Insurance and Disability Insurance Trust Funds, Table II.F19, p. 122.
worker. Millions of middle-class Americans are concerned that their
retirement income will be inadequate.
There is a way to meet their needs and aspirations, a way that would
take not one penny from Social Security but would offer all the promised
benefits of privatization. I would propose what might be called
"publicization."
I would offer all participants in the Social Security system-which I
would hope would encompass virtually the entire population, including
those who earn their income from capital without working-the chance
to make additional, entirely voluntary contributions to Social Security.
These would be credited to their individual Social Security accounts.
And they would be invested, by choice ofthe participant, in (a) a passive,
indexed stock fund, (b) a passive, indexed bond find, or (c) Treasury
securities. Contributions could be made not only by the self-employed
and employees themselves, but by employers on behalf of their employ-
SAVE SOCIAL SECURITY FROM ITS SAVIORS 91
Table 5
Average annual extra retirement benefits in 1998 dollars from
25 percent supplementary contributions
Rates of return
Years of
contributions 5% 5.5% 6% 6.5% 8% 10%
1 $45 $47 $49 $52 $58 $68
5 243 257 271 286 334 406
10 535 573 612 654 793 1,014
20 1,298 1,424 1,562 1,713 2,251 3,223
30 2,362 2,661 2,998 3,379 4,848 7,875
ees; employers might find offering such fringe benefits a cost-effective
way of recruiting and retaining workers.
The contributions would be tax-deductible, like current IRAs and
401(k)s, but ultimate benefits would be taxable. The contributors'
accounts would be credited with the income and capital gains on their
investments, whatever they were, both up to retirement and afterward.
They would, on retirement, receive actuarially fair annuities with cost-
of-living adjustments or, better, adjustments related to changes of wages
of those working.
Suppose these supplementary contributions amounted to 25 percent of
those now taken in payroll taxes. Total annual returns from the S&P 500
over the past thirty years have averaged over 12 percent. Suppose we
assume, more conservatively for future contributions, a rate of return of
8 percent, as shown in Table 5. Those contributing for thirty years
would then, on retirement,
receive an average $4,848 more in 1998
dollars. This would come to one-third more in benefits than they are
projected to receive from their mandatory contributions alone.
What is more, budget deficits as conventionally measured would be
sharply reduced-or surpluses increased-and the trust fund balances
would soar. This would happen because contributions would always be
pouring into the funds, along with income from the supplementary
investments before benefits were paid out.
We would then have the best of all worlds. Most important, the
retirement benefits of tens of millions of Americans would be increased.
We would preserve fully the social insurance of our existing Social
Security system. We would encourage private saving and investment.
We would reduce our measured budget deficit or contribute to a significant
92 JOURNAL OF POST KEYNESIAN ECONOMICS
surplus. We would eliminate all or most of the projected shortage in
Social Security trust funds.
Finally, if we wanted to go further and provide additional benefits for
all, we could have the Treasury credit everyone's Social Security
account with additional assets of govemment bonds and swell future
retirement benefits. Of course, again, any provision of additional bene-
fits to those not working, whether tied to Social Security investment or
privatization, would have to be provided by those working.
That burden can be eased, now and in the future, by adding to the total
wealth of our nation. It means providing for more workers and making
them more productive. It means provision of high-quality child care,
permitting reasonable immigration, maintaining full employment, and
investing in research and the human capital of education and health of
our people. These measures, and not decimating or destroying Social
Security, are the ways to advance our future.