The movement to fix Social Security is losing steam, despite the efforts of President Bush. And it's clear the opponents of allowing individuals to set up separate accounts with part of their Social Security taxes are winning the battle over such accounts. Unfortunately, they have used dishonest arguments.
First, they have talked about "privatizing" Social Security, as if President Bush were proposing that all of the Social Security taxes would to be directed into the private accounts, when in fact only a small part of the taxes would be so directed under most proposals. And individuals would have the option of choosing not to direct any part of their money into the accounts; they could stay wholly within the current system.
Second, they have emphasized the "riskiness" of separate accounts invested in the stock market vs. the supposed safety of the benefits promised by Social Security.
Jack M. Marco, chairman, Marco Consulting Group, wrote in a June 27 Other Views commentary in Pensions & Investments: "The three-legged stool concept is fundamental to secure retirement. Over decades, elected representatives have worked to make certain that two legs of this stool — pensions and Social Security — are protected and not at risk to the individual."
Tell United Airlines pilots their pensions were protected and not at risk. Tell it to the employees of Bethlehem Steel.The benefits of United pilots who have retired will be a fraction of what they expected because they will be paid by the Pension Benefit Guaranty Corp., which took over UAL Corp.'s pension funds and liabilities in the company's bankruptcy. For many of them, the hit the Pilots Variable Plan (a defined contribution plan) took from the bear market was less than the hit the pilots felt in benefits when the PBGC took over the UAL pension plan.
Even Social Security benefits are not free of risk. In fact, the United States Supreme Court has ruled that no one has any legal claim to a Social Security benefit. Congress could, but never would, abolish Social Security and pay nothing to future retirees. But Congress could, and well might, end Social Security benefits for higher income retirees.
Congress also can, and a number of times has, cut benefits prospectively. As a result of the Greenspan Commission's efforts to save Social Security during the Reagan administration, the normal retirement age for full Social Security benefits was pushed gradually to 67 from 65. This was clearly a benefit cut for those born after 1939.
Social Security benefits initially were not taxed. As a result of the Greenspan Commission, some Social Security benefits began to be taxed as ordinary income. This is clearly another substantial benefit cut.
One might say the only thing certain about Social Security benefits for those not yet retired is that they will be cut further in the future. Let's call this legislative risk.
Given the demographic trends, there is no way to save Social Security except through a combination of additional benefit cuts and tax increases.
In fact, individuals' retirement income might be in more danger from "legislative risk" reducing Social Security benefits than they are from market risk affecting 401(k) plan assets. An individual might be able to offset some of the market risk by diversification, and if the markets are down when he or she wishes to retire, delaying retirement until the market recovers is an option.
But there is nothing an individual can do to protect against additional cuts in Social Security benefits through further delays in the normal retirement age, through increased taxation or through means testing.
