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Bad News on Social Security



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My latest Bloomberg column goes through my reasons for thinking that a frontal attack on Social Security will actually set back the cause of reforming it.

The public worries that the program is unsustainable on its current path. And it is: The program has an unfunded liability of some $16 trillion. But in a Gallup poll in January, only 34 percent favored cutting Social Security spending — and the percentage among Republicans was identical. . . .

If anything, changes in public opinion have made reformers’ job harder. According to Gallup, 31 percent of non-retirees say they expect to rely on Social Security as a major source of income later in life. That percentage has been increasing in recent years, as Americans have grown less confident in their ability to fund their retirements with 401(k)s.

Jennifer Rubin, meanwhile, has asked Republican governors what they think of the program. Here’s part of an answer from a spokesman for Virginia governor Bob McDonnell: “It is estimated that by 2037, absent serious reforms, retirees will only receive 76 cents for every dollar they contribute to the program. That is unacceptable and it is unfair to the millions of workers who are paying into the system today and rightly anticipating that they will receive their full benefits when they retire.”

I don’t mean to pick on the governor here–I’ve seen this factoid repeated elsewhere, too, and I applaud his coming out for an increase to the retirement age. But I think the governor or his spokesman is confused here. What’s really estimated is that in 2037, absent serious reforms, benefits will fall to 76 percent or so of the “promised” level–not to 76 percent of what people have paid in. In most cases, even the promised level by then will be below the amount of taxes paid. And here’s the thing: Most of the reforms on offer, including raising the retirement age, would mean that the ratio of benefits received to taxes paid would fall further. People would pay into the program for a longer time and get benefits for a shorter time. There’s a funding gap, and that means that people are going to have to pay more, draw fewer benefits, or both. (Keep in mind that raising the retirement age, or implementing other reforms, does not change the actually achievable return. It just reduces the promised level closer to a payable level.)

Personal accounts can’t get around this problem. At the end of the day, one generation is going to have to pay for more than one generation’s retirement, and it isn’t going to get a good deal.



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