Social Security's not going bankrupt

The prolonged economic downturn is making most everyone painfully aware of the danger of using the financial market to build up pension savings. Two of the three legs of the legendary pension stool that are steeped in the market — employer retirement plans and personal saving plans — are now most shaky. Fortunately, a sensible solution is available that entails little fuss and bother, namely, expansion of the solid third leg, Social Security.

That program has worked like a charm and is regarded with great affection by the public. However, it has been maligned for so long that even President Barack Obama believes it has a problem. He has asserted the need “for a bipartisan solution to ensure the long-term solvency.” This belief has come to be widely held; but it is my belief, formed after much research into the actuarial basis of Social Security, that it is a sly fiction concocted by conservative think tanks starting in the early 1980s, the purpose being to turn the public away from Social Security in order to sell privatization as a replacement.

The state of Social Security’s solvency is therefore so important an issue that I will recap some of my findings bearing on why I do not agree there is a problem.

In a highly aggressive move, the Reagan administration tried to sharply cut back Social Security’s early retirement benefits. Congress in the 1983 raised the Social Security retirement age to 67, following the conclusion of the Greenspan Commission.

The onslaught on Social Security then continued in more subtle ways. The Reagan administration developed what the evidence suggests was a cautious, long-term and surreptitious tactic to make the program’s financial future look bleak. This is how it proceeded.

Social Security’s politically appointed trustees — none an actuary and most conservative — set the actuarial assumptions used for making the long-term (75-year) cost projections. This effectively empowers them to decide (not Social Security’s actuaries) whether there is a long-term deficit (or surplus) each year.

The deficit, as calculated by the Social Security administration, is a 75-year projection of the difference between the present value of all future benefits and the sum of current assets and the present value of all future income. This difference is then divided by the present value of future taxable wages to get the deficit expressed as a percentage of future taxable wages. For example, a 2% deficit means the contribution rate would have to be raised 1% for each worker and employer.

The deficit gradually rose — perhaps not surprisingly — from zero in 1983 to a high of 2.23% in 1997. And as it rose, so did the clamor by conservatives, in a powerful propaganda campaign, that the program was going “bankrupt” and needed to be privatized.

As a check on my suspicion of possible bias, I did a study in 2003 comparing the trustees’ estimated assets with actual assets over the 10 years ended in 2002. I found that for a key period 1992-1997, actual assets were understated by 20%, demonstrating undue conservatism in the choice of the official assumptions. More realistic assumptions yielded a small surplus, not a deficit. My findings, published in a prominent actuarial journal and presented at an actuarial meeting, have never been rebutted.

Given the evidence of no long-term deficit — even a small surplus — we have the basis for considering Social Security expansion as a solution to the problem the country’s workers are now facing of inadequate pensions in the future.

The virtues of expanding Social Security are legion: It was designed as a national plan, equitably relates benefits to salary and service, is not dependent on the survival of a worker’s employer, is not dependent on anyone’s investment acumen, and expenses are minuscule. Protection against inflation and outliving longevity are built in, as is portability. Investment market and corporate financial chicanery are greatly limited, and employers will likely sigh with relief to see burdensome federal oversight phased out.

The benefit expansion should be to the replacement level of about 70% of average pay for workers at the middle levels. This percentage would be higher for the lower levels of pay and lower for the higher levels.

There are various ways to keep the cost of the benefit expansion down to an acceptable level: raise the level of taxable wages from $106,800 in 2009 to, for example, $250,000 or more (with additional benefits calculated on the increased wage base), which would help the funding and be a boon to higher paid workers. Benefits and assets from existing plans could serve as an offset. There would be factored in as well the obvious saving to government due to the reduction in the tax subsidy that will result.

Further, the current $2.4 trillion reserve should be cut back to six to 12 months of benefit payout based on the proposed expansion to the 70% average level; if the annual payout rose to $1 trillion from the current $700 billion, then a reserve of $500 billion to $1 trillion would be used to arrive at the annual cost level, and the current $2.4 trillion would gradually fall to that range.

The task of establishing a national retirement plan will be complex; however, the rewards will be great for workers who will be better able to sustain living standards and not become financially dependent and become a drag on the economy and those around them. If the effort fails to get off the ground, we will be back to the ungainly expensive patchwork system we now have, and which will worsen with time.

David Langer is president and consulting actuary of David Langer Co., New York. He has served as a consultant to corporate and union pension plans for more than 50 years, and in the past 15 years, he has been a critic of Social Security’s actuarial basis.