My personal musings about anything that gets on my radar screen--heavily dominated by politics.


Why Social Security?

It's such a hot-button issue, once considered a "third rail" of American politics. You have to ask yourself why the President has chosen to make this his signature domestic issue of his second term.

Certainly, the forces opposed are both large and well-funded (think AARP), and the Democrats are likely to be able to hold thier caucus together in opposition to actual legislation. Given that, the odds of getting the reform through Congress is a 50-50 proposition, at best. And having the signature legislation defeated would cripple the remainder of the President's term.

So why push Social Security Reform?

The Rocky Mountain News has run a two-part editorial in support of this reform over the last two days. Some key points:

The problem is relatively straightforward: Payroll taxes at current levels are woefully insufficient to fund the benefits of 77 million baby- boom retirees. According to the most recent report of the trustees of the Social Security trust fund, this imbalance over time will lead to a projected $10.4 trillion in unfunded liabilities (promised benefits), plus $1.5 trillion to redeem the Treasury bonds in the Social Security Trust Fund.

This is an unsustainable trajectory, but not a few opponents of reform would prefer to ignore the math. In the late 1930s, when Social Security was in its infancy, there were 41 workers for every retiree. With rising life expectancies and declining fertility rates, the ratio plunged. It fell to 16 to one in 1950. It is now three to one and expected to fall to two to one by the time today's young workers retire.

Meanwhile, real rates of return have plummeted. When the payroll tax was 2 percent in the 1930s, the average rate of return for retirees was as high as 110 percent. Payroll taxes are now 12.4 percent of wages, but most young workers can expect future returns of less than 1 percent. . .

The worst 20-year return of U.S. markets has been 3 percent. Compare that to Social Security's future rate of return for younger workers, officially estimated at less than a paltry 1 percent. In contrast, returns on stocks, according to the Social Security Administration, are expected to be 6.5 percent. . .

Would financial markets look favorably on increasing the federal debt to cover the remaining costs? Most likely, since borrowing now prefunds future Social Security obligations that the government must eventually finance anyway. Over time, moreover, the use of private accounts would grow and therefore reduce the program's unfunded liabilities.

Private accounts won't solve all of Social Security's problems, but they would shore up the system while giving working Americans their own retirement wealth in the form of stocks and bonds. And they'd ensure that today's young workers and their children will be able to count on a fully funded pension system.

Now, if I were to base my own analysis on the numbers alone, it would seem fairly logical and straightforward that the system needs fixing, and that this proposal has some very attractive elements. But politics is only rarely based on logic, so it is unlikely that these arguments alone will prevail.

So, again, why?

The answer is simple: THIS President grasps the seriousness of the problem (which his predecessor also recognized), and THIS President has vowed not to pass on difficult problems to the next guy (which his predecessor did on any number of issues). There's a word for this sort of thing:


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