Social Security reform as a political issue was verboten just 10 years ago. No presidential hopeful in his right mind would broach that subject. Now though, the debate is not about whether to reform Social Security, but about how to reform Social Security.
Makes you wonder: Just what has happened to finally make discussion of Social Security reform acceptable dinner-table conversation? The answer to that starts with some generational realities.
Five generations are alive and kicking in America today: The GI generation (birthyears 1900-24), Silent generation (1925-42), Boomer generation (1943-60), Generation X (1961-81) and the Millennial generation (1982-present). Generational analysts sometimes differ over the exact boundaries, but at least we have a basic framework for all Americans born during the 20th century.
Social Security has been called “a compact between generations.” The oldest living generation, the GIs, dubbed by Tom Brokaw as “The Greatest Generation,” survived the Depression and two world wars one of which they won for us. They paid a heavy price and believe they earned the economic and medical benefits. (And you won’t hear this Gen-Xer claim otherwise.)
Its no surprise, then, that they have a certain special connection with government programs such as the G.I. Bill for higher education, Social Security and Medicare. And its no accident that those latter two are referred to as “entitlements.” The GI generation has seen itself as “entitled” to them. They have felt this way for the past 40 years, which meant that any discussion of changing these “entitlements” became suicide for politicians and legislators nationwide.
Thus was the “third rail” of American politics put into place. Touch it and you die.
But the generational makeup of the country has changed. By 1997, a new generational alignment had opened the door to reform. The leadership of the GI generation has given way to that of the Silent generation and, even more so, to the Boomer generation. In short, the generational constellation that dictated entitlement parameters during the 1970s and ’80s has shifted, with a corresponding shift in national attitude towards issues such as Social Security reform.
Have you thought much about today’s 65- and 70-year-olds? Unlike 10 or 20 years ago, they did not serve in World War Two and their formative musical years were not Benny Goodman or Glenn Miller, but Elvis Presley and Chuck Berry. These members of the Silent generation were children during the Depression and the war. They experienced the era not as adults struggling to survive, but merely as a family member to be protected. As adults, they reaped the benefits of job security and low interest rates throughout the ’50s and ’60s. They also were the inventors and purveyors of the national mid-life crisis we call the 70s.
Generational authors Neil Howe and William Strauss put it this way: The Silent generation’s adult “surge to power coincided with fragmenting families, cultural diversity, institutional complexity, and prolific litigation. They are entering elderhood with unprecedented affluence, a hip style, and a reputation for indecision.” Instead of a feeling of entitlement, rather we see among the new retirees of the 1990s a drive to make amends to their children and grandchildren. One way to do this: Show far less resistance to discussion of Social Security reforms.
Now what about the Boomers? What’s their role in the new generational firmament? The Boomers grew up during the GI-led progress of the post-war era; they came of age under the tutelage of the Silents and helped to usher in the sexual revolution, self-awareness, and the consciousness raising. When they got bored with all that, they began 20 years of “Culture Wars.” Matters never before part of political debate suddenly were, and usually in a bitter and personalized way.
In short, Boomers love to argue with each other and society and they seem more likely to fight over ideology, values and “vision” than over simple money and programs. Though they dont feel entitled to Social Security in their coming senior years, they do worry that the system could break down leaving them broke and, even more so, breaking their children.
Add it up: GIs fading away, Silents taking over the sixtysomething age bracket, and Boomers looking to make sweeping gestures, As this new generational constellation took shape, the writing on the wall was becoming harder to ignore.
Enter the newest generation of adults: Generation X, which today claims the ranks of twentysomethings and thirtysomethings. Though we won’t begin retiring until 2026, it’s already obvious that Xers face the worst consequences of doing nothing to fix Social Security.
A poll of college students (all Xers) in 1995 found that a huge majority believed they were more likely in their lifetime to see a UFO than a Social Security check. Xers began to speak out on the issue and were joined by reformers from the more practical Silent generation, and the more ideological Boomer generation. At long last, Social Security was a “third rail” with some traffic on it (and the traffic was not heading over a political cliff).
Social Security as we know it is undeniably generationally inequitable. It is the elder generations, paying relatively lower taxes and receiving relatively higher benefits, who have benefited the most from Social Security. Whereas Xers and Millennials face a growing tax burden, with relatively less and less benefits in the future. Thanks to the activism of the past six to seven years, the flaws are well known to us. The trust fund created in 1983 to strengthen the system to withstand the onslaught of Boomer retirees is in dire shape. Congress has regularly raided it to cover other expenditures. Projections show the system facing deficits by 2013 or soon after, followed by bankruptcy in the mid-2030s an inability to pay more than 75 percent of the benefits promised.
I am 33, by the time I retire it will take almost $700 million in new taxes each year to keep Social Security solvent. That is nearly the amount of all Federal income taxes collected from individuals in 1996. In 30 years, when todays middle-school Millennials reach their most productive work years, it will take the total combined payroll taxes of two of them to support one of their parents under the current Social Security system, and those taxes will be significantly higher maybe as much as 50% percent more. In 2075, the last year for which Social Security estimates are provided, the annual shortfall of the just Social Security itself will be a staggering $7 trillion. Thats more than four times 1999s entire federal budget of $1.7 trilliion. Remember that children 11 and under will not retire until 2054. What then for the Millennial generation?. How will they support their own children when they are struggling to make ends meet under the press of huge new taxes needed to prop up Social Security?
So, at long last the debate is not over whether there should be reform, but what type of reform is best. More than half of the voting public now accepts that Social Security needs to include a mandatory retirement account owned by each individual, and protected from government raiding. Such a private account could be invested in an accredited mutual fund or 401(k)-type program. (It could not go into speculative investments any more than current insurance funds of government employees can be placed in fly-by-night health companies.)
The most common reform proposals have these principles in common:
- First, retain promises made to current retirees and those nearing retirement, the reforms do not affect them.
- Second, individually owned, personal retirement accounts must be included.
- Also, widows, dependent children and the disabled must be cared for under the current Social Security system.
- And, a dignified benefit level needs to be guaranteed to each worker that pays into the system.
These principles are most easily instituted through a two-tier system. Out of the 12.4% that each employee/employer currently pays in, the first tier would pay the obligations we have under the current system. The second tier would go into a private account that each worker could then invest the same way 401(k)s and IRAs are handled today. The key is that these accounts are owned by each individual, safe from government “raids,” and under the direction of the worker, not the government. Such a system is now more than plausible, it is probable. Granted, the devil is in the details: What if the market crashes? What about the transition costs?
Well, since 1926, the average real rate of return on the stock market has been over 7 percent. The worst 20-year-period from 1929 through 1948, including the market crash of 1929, had a positive real rate of return of more than 3 percent. Compare that to the 1 or 2 percent rate of return Social Security promises Boomers, Xers and Millennials. (Currently some age groups and ethnic groups actually will receive negative rates of return from the money they pay into Social Security.) Lets bring it home folks: in Washington state the average rate of return on Social Security for women is only 2.41%. For Washington state males it is even worse at just .069% (Heritage Center for Data Analysis). Clearly, the market is not the risk, the risk is in not fixing the system.
The other critical question is where the transition money will come from. (It is imperative to note that there are a number of bi-partisan proposals which cover the transition costs.) One answer is to use the near-term Social Security surplus to guarantee the programs long-term viability. There will be an estimated $25 billion per year surplus in Social Security through 2013 (Economic Security 2000). Currently the government is raiding the trust fund to pay other debts, instead it should be used to pay the benefits promised in tier one and help fund the individual accounts that make up the second tier. And, as the individual capital accounts grow over the years, income from capital will continue to increase and that money will eventually help pay Social Security benefits. The tier two Social Security private account income grows from about $100 million per year to over $500 billion per year by 2050. As Tier 2 private income grows, dependence on federal taxes to pay Social Security benefits decreases. Most Social Security benefits can be paid increasingly from capital in the funded personal accounts.
These policy changes are likely because of (a) a new generational constellation combined with (b) the grim demographic and fiscal facts. Most recently, a USA Today/CNN/Gallop Poll in June showed 59% of likely voters favoring a system that includes some form of individually owned accounts. A nationwide Zogby poll last year showed heavy support for a system that gives those who want it the choice of investing their Social Security taxes through individual accounts similar to IRAs or 401(k) programs: 55% of all likely voters favored this system; 71% among likely voters aged 30-48; and a whopping 79% of voters under the age of 30.
In a separate poll conducted by Public Opinion Strategies on behalf of the CATO Institute, opinions of Social Security were even more favorable, with 69% of all voters favoring adding private retirement accounts; 80% of Generation X voters; 77% of Boomer voters; and even 47% of Seniors favored such a plan.
The time has come to reform Social Security, to replace the inequity with genequity. The generational shift has opened the door and the harsh math is pushing us through it. We know how to guarantee generational equity for todays younger generations and those yet to be born. Now it remains to shut up and just do it.
Robert Crowther is Director of Public & Media Relations at Discovery Institute, and a senior partner of the Generational Inquiry Group (see www.millennials.com), where he covers economics and culture with a generational viewpoint.