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You can’t complain about the lack of
political debate these days. We’ve
had debates on television, debates in the newspapers, and in
New Hampshire
at least, debates in every grocery store and coffee shop you can
find. The campaign
season has been in full swing for months, and the media have ramped
up the efforts to bring it all into our homes.
Those debates have pressured us all to take sides on issues and
candidates, which are instantly quantified in the results of endless
polls. That’s great
for the candidates and the professionals who manage them, but is it
good for the rest of us? Aside
from settling the various horse races for those who seek political
power, do these debates move us forward in addressing and
effectively managing the challenges we confront?
In the case of Social Security, the answer is a resounding no.
That was underscored last week when an unelected official
with no stake in the election, Fed chief Alan Greenspan, bluntly
warned Congress that it needs to reduce benefits or increase the
retirement age today to head off disaster in the coming years.
From the reactions of candidates on the stump, you would have
thought that he was speaking a foreign language.
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Mr. Greenspan merely amplified what economists and
actuaries have been saying for years.
The oldest baby boomers will begin reaching retirement age in
2008, and the cumulated promises the Federal government has made to pay
them will come due. It will
be the job of those of us who are working to make good on those
promises, and the projections say that without significantly higher tax
rates, there won’t be enough.
Our elected officials have failed to manage this problem.
In fact, they have made it worse by adding prescription drug
coverage to Medicare, another underfunded promise the working generation
will have to make good on. But
that’s a column for another day.
Instead, what passes for a debate on Social Security centers on the
issue of privatization. At
least that is what people think they are debating.
At times it sounds a lot more like a debate on the entire private
economic system.
Privatization, or the diversion of our tax payments away from the Social
Security system into private investment vehicles, is either evil
incarnate, or our last hope, depending on your political persuasion.
But here’s why the idea is not going to go away.
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A working couple that is 30 years old today and
earns $52,000 a year can only expect a rate of return of between 1 and 2
percent in Social Security. If
they were to set aside 12.4 percent of their income, equivalent to the
sum of their own and their employer’s tax contributions, into an
account with that return, they’d have about $300,000 of accumulated
savings to spend down when they reached age 65.
But there are risk-free investments in the private sector that perform
much better than that. If
those payments were put into U.S. Treasury Bonds, earning about 5.5
percent, the nest egg would be just under $700,000.
And if they invested in the market and got a 7 percent return, it
would be almost $1 million.
But there’s a catch. Uncle
Sam needs every cent and every dollar of revenue from the payroll tax
just to make payments to those receiving benefits.
Even a small diversion brings the day of insolvency closer.
That’s why we should be paying attention to Mr. Greenspan.
Call it tough love, or call it protecting Social Security, but
something must be done now to throttle back benefit growth to get this
problem down to a more manageable size.
Patrick M. Barkey
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