Stanford University

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NEWS RELEASE

4/24/00

Kathleen O'Toole, News Service (650) 725-1939; e-mail: kathleen.otoole@stanford.edu

The 'real deal' about 'new deal' Social Security

In the 1960s, Walter Cronkite occasionally shocked TV audiences by showing elderly Americans eating dog and cat food because they could not afford a regular diet. Eventually, Social Security payments were raised above the absolute poverty level. In the future, TV news may instead show young working Americans and their children eating pet food, two economists say.

But the more likely scenario, they add, is that many of today's children will forgo having children they can't properly care for.

"If the Social Security tax burden gets so high that we are taking food off the table of our children, you could end up with a society that implodes. . . . People can't afford to get married and have kids," says Sylvester Schieber, co-author with Stanford economics Professor John Shoven of a new book on the history and future of America's Social Security program (The Real Deal, published by Yale University Press). Schieber, the director of research and information for Watson Wyatt Worldwide, points to the low fertility rates in Spain and Italy -- countries that have higher social insurance costs than ours -- and to the budgetary problems in Japan, where fertility is extremely low and the population is aging even more rapidly than in the United States.

"I think the crisis will hit us between 2010 and 2019," says Shoven, who directs the Stanford Institute for Economic Policy Research. He rejects 2037, the latest official date of insolvency forecast by the Social Security Administration. Among other things, he says, the government report is too optimistic because it underestimates by at least a year the average increase in life span of baby boomers. If Shoven is right about the timing, that means his 13-year-old son James will be in his late 20s or early 30s when Social Security financing reaches a crisis state. The likely reaction, Shoven says, will be a significant hike in payroll taxes.

"Young people don't have any faith in the Social Security system, and they are right, as it stands," Shoven says. "But at some juncture, I hope parents will begin to look at the situation and say, 'We don't want to do this to our kids.'"

Congress and the president so far have been unwilling to tackle the problem because "there is no free lunch," the authors say. Shoven gives credit to the Clinton administration for raising public awareness of the problem, but all the proposals put forward so far by Democrats and Republicans have tried to mask either benefit cuts or tax increases in order to make the plans seem more palatable to voters.

The authors hold out little hope for reform after the fall elections. "Gore has said he won't consider increasing the retirement age because organized labor is adamantly opposed to any change in the status quo," Schieber says. "Bush has indicated he supports some element of individual retirement accounts, but he has not articulated any specifics." Some congressional candidates bring up the issue, but the most likely outcome of this year's elections is a stalemate on the issue, the two say.

Shoven holds out hope that as Americans become more concerned and knowledgeable, they will force the issue on to the agenda, in the way that tax reform gradually built momentum before the 1986 tax reform. More likely, he concedes, will be a situation like the savings and loan crisis -- but on a larger scale. "They swept the S&L mess under the rug for 10 years. When they did clean it up, it was more expensive," he says.

Writing for lay people in their book, the authors look behind the rhetoric of political candidates and other advocates by summarizing debates that have taken place largely behind closed doors first during the New Deal, when the program was created, and up through the last Social Security Advisory Council in 1994-96. The latter council was the first one to discuss seriously how to resolve the unsustainability of the current national retirement system. While the commission couldn't reach an agreement, its debate highlighted the necessity of real reform, Shoven says.

In the final chapter, the authors propose their own plan. It includes a flat, fixed monthly payment in retirement as well as a requirement that workers contribute to a new "personal security account" for their retirement. They reject both liberal plans for maintaining or increasing benefits and conservative plans for completely privatizing the system.

"Pure privatization, like they have in Chile, is not going to happen, and we don't think it should," Shoven says. "That would mean there would be no redistribution and lots of risks. We want to leave a tier-one floor of benefits that would be the same for a janitor at Stanford and for Bill Gates."

Under Shoven and Schieber's proposal, a low-income married couple with working careers would get $1,000 a month for retirement. If they invested their personal security account in high-risk assets that did not perform well, they might end up with a total of only $1,200 or $1,400 per month. If they invested prudently, they should wind up with substantially more. "The $1,000 base amount protects them from most of the risk of their investments," Shoven said.

The security accounts they propose would require workers to save 2.5 percent of their income for retirement with the government providing a matching contribution of 2.5 percent. "This is somewhat like our retirement plan at Stanford," Shoven noted.

Shoven and Schieber reject central investment of Social Security funds in the stock market. The gains will not be sufficient to head off a Social Security tax increase, and it is likely future Congresses will dip into a central fund to finance other programs, they say.

The authors also would raise the retirement age to reflect increasing life spans but retain early retirement provisions. Both said they are pleased that Congress and the president recently agreed to end the restriction on how much retired beneficiaries can earn and still keep their Social Security benefits. While they would like to see baby boomers work longer, there is some doubt, Schieber said, that employers will keep them on as full-time workers.

The recommended plan preserves the principles the authors think are most important to Americans: reasonable administrative costs, the retention of a "safety net" for people who have low labor-market earnings, and some risk borne by individuals, who may then save more of their income, which would help the economy. Equity between one-earner and two-wage-earner couples also would be increased.

"Economists generally agree that higher rates of savings would help the economy grow," Shoven said. "Where they begin to disagree is on how much people will adjust their other savings if they are required to save for retirement. I expect that roughly half of the money going into these new accounts would be new savings, but we did not count on that positive feedback in modeling our proposal."

The authors, both baby boomers, hope younger generations will raise the issues with their parents. Schieber's daughter, Shannon, was studying retirement issues and raised them with her father in a letter, just before she was murdered in May 1998 by an intruder in her apartment. It was at her funeral that the two economists vowed to write a book on the subject in her memory.

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By Kathleen O'Toole


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