Thoughtful Thursday - Social Security Reform

President Bush was in Montgomery today talking up his plan for reforming Social Security, as others expressed their opposition. The President's plan for the program represents the boldest move yet in his "compassionate conservative" agenda.

As with other reforms the President has supported, such as the faith-based initiative, incentives for home ownership, tax relief, and health care savings accounts, his plan seeks to transform a culture of dependence into one of individual freedom and responsibility. Adding an option for private accounts to Social Security is central to creating the "ownership society" that the President envisions.

Opponents of the President's plan are right to point out that private accounts would add new risks to a program that has lasted for 70 years. As anyone who has a 401(k) or IRA knows, investment in capital of any type brings with it inherent risks, whether the investments are in stocks, bonds, real estate, money market accounts - you name it. These risks are well-known: they stem from inflation, interest rates, instability in stock prices, etc. But, as more and more Americans have begun investing, they have become accustomed to these risks, and have gained a remarkable level of comfort with them. Maybe that's because they understand that life itself is risky - why should anyone expect investing to be any different?

We also have to face the fact that keeping the Social Security system "as-is" entails its own risks, some of which result from shifting demographics, political considerations, and human mortality. Each of these has profound implications for the future of the system. Taking them one by one:

1. Demographic risk. Social Security is a "pay-as-you-go" system. Current workers pay for current beneficiaries. As the population ages due to a shrinking birth rate and greater longevity, this will create tremendous stresses on the system in the future. In 1950, there were 16 workers for each retiree. Today, there are about 3.3 workers per retiree. By the year 2030, that ratio is projected to shrink to less that 2 to 1. If the structure of the Social Security system is not changed, there are only a few solutions to this problem, none of which are pleasant - increasing taxes, raising the retirement age, or cutting benefits. All of these options represent significant risks for future beneficiaries.
2. Political risk. A common misconception about Social Security is that there is an pot of money sitting in Washington, D.C. with each of our names (or Social Security numbers) on it. That is simply not the case. If you don't believe me, go to the Social Security Administration's web site and check it out for yourself. Since Social Security is a government-run program, its money is controlled entirely by the government, and there is no legal obligation to pay benefits to those who have paid in to the system. Therefore, every dime of Social Security's money is subject to political whims and chicanery.
3. Mortality risk. Ashes to ashes, dust to dust. We're all gonna die. Some sooner than others, and some before becoming eligible to receive Social Security benefits. For those unlucky folks, Social Security doesn't currently provide a way to transfer wealth to their heirs. That "pot of money" in your name will go to pay for someone else's benefits, and your progeny will be left to fend for themselves.

Those are just a few of the most obvious risks involved in sticking with the current system. They should be of special concern to those of us who have many working years ahead of us before retirement. Private accounts would alleviate each one of them by taking money out of the hands of government and putting it under the control of individual citizens. There is a great deal of "hard work" ahead in persuading the American people of the necessity for reform, but as he showed today in Montgomery, President Bush has gotten off to a good start. He needs all the help he can get.