Social insecurity

Talk about your risky schemes.

All we hear from opponents of President Bush's proposal to let workers
put some of their Social Security money into Personal Retirement
Accounts (PRAs) is how risky it would be. Look at the stock market's
troubles, they say. One big downturn, and half the seniors in America
would be living in alleys, eating from cans.

Better stick with the tried-and-true, they say. At least that money's
guaranteed.

Only, it's not.

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That's right, the real risky scheme here is Social Security as currently
constructed. The money isn't promised. Congress has pointedly refused to
do so on several occasions. And while no one is talking now of cutting
back on Social Security, that's no guarantee no one will in the future – particularly when people the age of my children reach
retirement age, and the workers who are to support them see the price
tag.

Here are a few indisputable facts, courtesy of my Heritage Foundation
colleague David John (who makes the case for reform in his latest paper
"Answering the Top 10 Myths About Social Security Reform"): Today,
the government takes in more money in Social Security taxes than it pays
out in benefits. There's no "lockbox" into which these surplus dollars
go. The government simply lends itself that money for other purposes at
little or no interest.

In 2017, six years after the oldest baby boomers reach retirement age,
the amount the government takes in no longer will cover the amount it
pays out in benefits. In other words, the program will fall into
deficit.

By 2020, lawmakers will have to find $72 billion to cover that year's
Social Security deficit. They'll need $275 billion to cover 2030's
shortfall. By 2050 it will be up to $429 billion; by 2070, $719 billion.
In a half-century, the government will have had to "find" $25 trillion just to make up for Social Security's deficits.

By then, workers will face a terrible choice: Either watch their tax
bills climb by half or more, or see benefits to their parents and
grandparents sliced by a third or more.

At this point, workers – a.k.a. voters – might find it simply
unaffordable. They'll have even less incentive when they realize they'll
have a better chance of their own retirement being paid for by Powerball
than by Social Security. Then, what happens?

Of course, it takes courage to change. There are transitions costs.
Social Security's actuaries estimate that it would cost $7 trillion to
set up PRAs and ensure the solvency of Social Security permanently,
provided we don't wait. But compared to $25 trillion to keep the present
system afloat, it's quite a bargain, as David John shows in a report on
the kind of two-tiered system we could put in its place.

Then there's the risk. Opponents gleefully point out that the value of
mutual funds invested in sound U.S. stocks fell 12.1 percent during the
second quarter of 2002. But long-term investors, such as those saving
for retirements, know bumps in the road are part of the landscape and
that sound investments pay dividends over time.

Since 1802, stocks have earned an average of 7 percent per year,
adjusted for inflation, in the United States. In all the 10-year periods
since the New York Stock Exchange began in the early 1920s – that's
1924 to 1934, 1925 to 1935 and so on – investors lost money in only
six, and there never has been a 30-year period in which they did not
profit. If past is prologue, young workers can expect to make much more
from a PRA than from Social Security.

Even after the recent losses, someone who began a PRA 40 years ago and
retired last week would make three times more from a PRA than from
Social Security. That's the difference between hanging on and living.

Plus – and this is a biggie for African-Americans, blue-collar workers
and others with lower life-expectancies – money in PRAs can be
bequeathed to family members. Future generations could find themselves
comfortably removed from the life-and-death decisions that otherwise
will confront taxpayers in the next 70 years.

In a way, the critics are right: Social Security has no risk. It's
guaranteed to crash and burn – unless we take responsible action now.
It's not getting any cheaper to solve this problem, and the sooner we
start the better.