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February 10, 1998

Will Your Check Be in the Mail?

Forecasting Prospects for Social Security and Pensions

by Konrad M. Kressley

This is the sixth in a series of articles about what to expect in the foreseeable future. If you believe in individual responsibility and self-reliance, your wish is likely to be fulfilled in the next century. Unfortunately, it will come when you least want it, during your retirement years. Those who have read earlier installments in this series are surely aware that several trends are in the process of converging. Average life expectancy continues to grow, while the birth rate is lagging. The baby boom, which occurred in the middle of the 20th century, will create a one-time imbalance of long-lived elderly folks during the first half of the next century. Meanwhile, economic trends give cause for concern. First, there are no signs that personal and public indebtedness trends will be reversed; secondly, the Information Age labor market looks dismal from the perspective of long-term employment and job security. What does this mean for the prospects of 21st century retirees?

Social Security: Rock or Quicksand?

In the history of our nation, few social programs have been as popular or successful as Social Security. Unfortunately, opinion researchers now report that more young people believe in flying saucers than believe Social Security will still be here when they retire. Before we consider the current crisis, let us briefly review the origins of the program. The birth of Social Security in 1935 was part of the federal government's New Deal policies to combat the ravages of the depression. It began as a very modest program to provide a financial safety net for retired workers past the age of 65 which, coincidentally, also happened to be the male life expectancy at the time. Unlike a "fully funded" system, where workers contribute to a personal account, the U.S. opted for a "pay-as-you- go" system, in which everyone contributes to a common account. The benefits for each generation of retirees are paid from the taxes of current workers, who in turn would be supported by the successor generations. This had the initial advantage of providing a quick pool of funds to help those who were already at the end of their work life and could not accumulate a life-time's worth of personal contributions. It also made it possible to tilt the pay-out formula in favor of the most needy recipients. The entire system is enormously complicated and cannot be fully explained here. Suffice it to say that this pay-as-you-go system worked great as long as more money was coming in than was leaving the system. And that was the case during most of the system's existence. In fact, the volume of contributions was so great during the post-war economic boom that the authorities were able to expand the system and transform it from a safety-net into a universal pension plan while adding more and more benefits, including escalator provisions for periods of inflation. Consequently, most beneficiaries have received far more money from the system than they ever paid in Social Security taxes. No wonder the program is so popular.

Figure 1. Social Security Burden
A dwindling number of workers pay into the pool of Social Security funds that support retirees, the disabled and other recipients: In 1950, 16 workers paid Social Security taxes for each beneficiary. Today, only 3.3 workers support each beneficiary and by 2034 just 2 will carry the burden.
As we look into the next century, the outlook is reversed. There's a double-whammy. First, people can expect to live well beyond sixty-five and will need more money to finance that longer life span. Second, as birth rates plummet, the dependency ratio of contributors to beneficiaries will dwindle, causing the fund to dry up (See Figure 1). Furthermore, leaner economic times, coupled with the arrival of the Information Age, signaled waves of industrial down-sizing. Sensing a possible meltdown of the system, the Reagan administration called on the noted economist Alan Greenspan to head a study commission on Social Security. The Greenspan Commission's report in 1983 offered several incremental measures to keep the system afloat. First, retirement eligibility age would be gradually ratcheted upwards to keep people in the work force longer. Early retirement would be discouraged. Future benefits would be doled out more carefully, particularly to those who had post-retirement employment or substantial income from other sources. Finally, Social Security taxes were to be raised to provide a surplus or cushion for the 21st century. The pace of change is so minute that few people are aware of how they and their pay stubs are being affected.

While the 1983 reforms made sense in economic and demographic terms, critics contend that the reforms did not go far enough and that the system still faces bankruptcy around 2030. The current status of the surplus is also controversial. By law, all Social Security funds must be invested in U.S. government securities, typically long-term bonds. While the Social Security Administration holds the bonds, the dollars used to buy them flow into the federal government's general fund. Currently, Washington politicians are slapping each other on the back for having balanced the budget. Unfortunately, that balanced budget includes far too many dollars that are owed to Social Security recipients in the future. Without getting technical, the balanced budget is a fraud, particularly since national debt, counted in trillions of dollars, is conveniently forgotten at the celebration.

Pessimists are concerned that as long as our government uses Social Security surplus funds to pay for other things, it must either raise taxes or slash spending when it's time to make good on its obligation to Baby Boomer retirees in the next century. Prospective retirees have ample cause to fear that default, inflation or other economic calamity could suck the system dry long before then. Generation X, the Baby Busters, have even greater cause for alarm. They will not only have the burden of debt created by their elders, but might also face an empty Social Security kitty when it's their turn to retire.

If you don't trust Uncle Sam, you might be interested to know that the folks on Wall Street are proposing that Social Security be privatized. Instead of buying more of those suspect U.S. bonds, peoples' taxes would be used to purchase corporate securities to be held in "personal Savings Accounts." After all, the stock market has gone up like a rocket during the past decade. While this would put an end to government monkey-business, there are some serious problems. To begin with, economists doubt whether the private securities market could efficiently handle a huge influx of investment capital. Instead of privatizing Social Security, we'd be nationalizing the stock market. The first beneficiaries would likely be securities sales people, whose commissions would come off the top. Finally, financial markets are not totally predictable. While everyone cheers a rising market, few people can stomach Wall Street gyrations when their future is on the line. The market "correction" of late 1997 certainly dampened enthusiasm for getting government out of the Social Security business.

So what will happen? There is a consensus among the experts that the demographic and economic booms in the middle of the 20th century were somewhat of a historical detour. Realistically, we will be neither willing nor able to pay for commitments made during those years. Future historians may shake their heads about a society that felt so rich that it could subsidize the retirement of millionaires. Considering unfolding trends, Social Security must be preserved but will most likely revert to its original purpose: to serve as a safety net or anti-poverty insurance for retired workers who have no other source of support.

Slippery Pensions

So what if Social Security tanks; you've still got your pension. Right? The sad truth is that pensions are also heading South, if you know what I mean. It's one of those situations in which the identical set of trends is forcing government and business policies to head in opposite directions. While the Social Security Administration would like folks to work longer and contribute more, the business sector is trying to shake that same group of workers out.

Why this paradox? If you read an earlier installment in this series, you know that the work force is being dramatically reshaped as we enter the next century. For one thing, the Information Age requires far fewer people on the job. Secondly, there will be fewer permanent employees and many more temporary or part-time employees. Check out any business and you'll find that full-time positions with benefits are becoming scarce. Considering the breathtaking pace of technological innovation, business people prefer flexibility in terms of their work force. They are also aware of future demographic projections: long-lived pensioners erode not only current, but also future profitability of any enterprise. No wonder the business sector is doing its best to escape pension obligations.

Those waves of corporate downsizing and consolidation, which began earnestly in the eighties, were more than a response to efficiencies offered by Information Age technology. They also allowed organizations to strip away layers of middle management. While this made good business sense, it spelled personal disaster for individuals, who at middle age, faced loss of future pension benefits with no equivalent employment opportunities. There were, of course, "golden parachutes" for top managers, but those at the lower levels found little joy once their "early-out" bonus checks had been spent. In some cases, such as Pan Am Airways, corporations actually went bankrupt and tried to reorganize with the intent of shedding pension obligations in the process. But let's not demonize the corporate world. 20/20 hindsight shows that pension policies, such as Social Security, were established under vastly different demographic and economic conditions half a century ago. Some of the same developments can be observed in the public sector, where the armed forces and related defense industries took a hit at the end of the Cold War.

Those pension systems that survive are being redesigned to reduce employers' future risks and place the monkey on the backs of contributors. Technically, "defined contribution" plans are replacing "defined benefit" plans; workers and their employers make regular contributions to an investment fund, but the ultimate pension pay-out depends on how well investments perform rather than a company's guarantee of specific future benefits. In a way, this "do it yourself" pension is more like a company sponsored IRA. Advocates of individual responsibility like it because participants usually have some flexibility in determining the pension contributions. These retirement plans are also portable, making it possible to maintain coverage when changing jobs. Another trend is for companies to turn their retirement plans over to insurance companies, which further insulates management from the demands of present and past employees.

The Stool's Third Leg

Now comes the part about individual responsibility. If both Social Security and pensions are uncertain, folks need to take a greater personal role in providing for their future. Retirement experts look at an individual's old age resources as a three-legged stool: one leg represents Social Security, another pensions, and the third consists of individual savings and outside sources of income. A stool with only two or -- heaven forbid -- one leg is like to topple. The message for middle- and upper-income folks is clear: if you want adequate retirement income, you'll have to sock it away on your own.

Besides individual responsibility, this form of saving requires resources, wisdom and self- discipline, which not all of us have. The folks in official Washington know this. They also fret about the precarious future of Social Security and want to take some pressure off that system by promoting a host of individual savings schemes. The various government endorsed plans are much too complicated to be explained here, except to say that people who save for their own retirement are rewarded with tax relief. Tax accountants tell their clients that it's like getting free money; pay less tax today and reclaim your investments at reduced senior-citizen tax rates later. Furthermore, by investing their contributions in securities, folks can help the business sector raise much needed capital for growth and expansion.

While this makes sense to both government and well-off individuals, not everyone will be able to take advantage of Individual Retirement Accounts and the associated tax breaks. Far too many people still live from pay check to pay check, and never contemplate the future. They would be better served with decent Social Security and pension prospects which don't require them to wrestle with the daily anxiety of making ends meet while having the prospect of a penniless old age at the back of their minds. For better or worse, Social Security, with its automatic deductions, has given people a certain peace of mind. As long as you worked and paid taxes, retirement was on auto-pilot.

No matter what happens to Social Security, a large group of people are still destined to fall between the cracks. Chief among them are single women who have worked in household or domestic situations. Immigrants, working in family enterprises, also fit this category. According to the tradition of their home countries, an extended family typically supported its elders. However, as the successor generations become Americanized, they could well lose the filial ties and let the elders fend for themselves. Then, don't forget about all the people living in the "cash economy," including self-employed artists, migrant farm workers, yard men, restaurant servers, and the like. Some even feel smug about dodging the list of payroll deductions salaried people must tolerate. On the other hand, they will end up with chump change in terms of retirement benefits when they need it most.

A closing thought: If you want to learn more about your own future call 1-800-772-1213. It's a toll-free number for the Social Security Administration where you can request a personal earnings-and-benefit statement. The system then directs its computer in Baltimore to audit your records and provide a projection of retirement and disability benefits. On getting the news, you may want to reconsider your retirement plans. Don't be squeamish, go ahead and call.

The next installment in this series describes the prospects for health care in the next century.

The Harbinger, Mobile, AL