When making their case to the American public, the forces committed to privatizing the Social Security system face a major challenge: the popularity of the current system. In order to sell their case for reform successfully, advocates for privatization must paint a picture of Social Security as teetering on the brink of crisis.
Unfortunately, the buoyant economy continues to push the date when the Social Security retirement and disability trust funds will be depleted further and further into the future. Currently, the trust funds are not expected to run out until 2038.
However, in the past few weeks, proponents of privatization, including members of the President’s Commission on Social Security reform, have moved this “drop dead” date up. The real crisis date, they now say, is not 2038, but 2016 – the first year when the outflow of Social Security benefits would exceed the inflow of Social Security contributions.
This argument is incorrect. It implies that the taxes in excess of benefit payments that working people have paid to prefund the system since 1983 are worthless. It implies that the federal government is not going to honor its claims when the trust funds seek to redeem the bonds it has acquired with the excess payroll taxes. Neither is true.
The excess payroll taxes that have been used to build up reserves in the trust funds have increased national saving and in recent years have helped pay down the debt. In this way, the very real sacrifice of today’s workers has boosted investment and enhanced our capacity to pay future benefits.
Once Social Security benefits exceed contributions in 2016, the system can continue to pay benefits by redeeming the bonds held in the trust funds. Neither Social Security nor private pension funds hold “real assets” in their portfolio; they both hold IOUs or the paper promises of some public or private entity to pay interest or dividends. In both cases, the value of the assets depends on the willingness of someone to redeem them. Private sector portfolios rely on US bonds as their bedrock security, because government obligations are more certain to be redeemed than those issued by the private sector.
The government not only has the means to pay, but it is inconceivable that lawmakers would allow the government to default on its obligations.
The argument that the federal government will have to raise taxes or cut spending to redeem Social Security in 2016 does not make the system’s assets any less “real.” If General Motors or IBM redeemed the government bonds in their pension funds, the Treasury would also have to raise new funds to pay them off. The bonds in the Social Security trust funds are just as valuable as the bonds in private pension funds. And the date to worry about is 2038, when the trust funds are exhausted, not 2016.
Social Security is facing a long-term financing shortfall that needs to be fixed. Many options exist to solve the problem. Raising a false alarm just confuses the issue.
Alicia Munnell is Peter F. Drucker professor of Management Sciences and director of the Center for Retirement Research at Boston College. R. Kent Weaver is a senior fellow in governmental studies at the Brookings Institution.