From the Center for Full Employment and Price Stability - UMKC

We believe that the Interim Report approved by the President's Commission on Social Security Reform is a biased and flawed
report. It grossly exaggerates the financial problems that might be faced several decades from now. More importantly, it
seriously overstates the increase of the burden of providing for future retirees that will be experienced through mid-century. Its
claim that the program is "broken" and requires an "overhaul" before 2016 is tantamount to arguing that Congress will not put
the full faith and credit of our government behind America's most popular social program. The Report appears to have adopted
a tone of urgency, and even scare tactics, in an attempt to push an agenda that favors privatization. We do not believe that
privatization is necessary or prudent, nor do we believe that it can reduce tomorrow's burden. Rather than looking to such a
fundamental change to the nature of the Social Security program, we believe that relatively minor changes to be made at some
point in the future will fully resolve any problems to be faced. We urge that Congress reject the arguments made in this report
and that it refuse to take unnecessarily drastic action.

BACKGROUND AND ANALYSIS OF THE INTERIM REPORT

On July 24, the President's Commission on Social Security Reform approved its interim report proclaiming that the Social
Security system is unsustainable and requires a "fundamental restructuring". While the Co-Chairs carefully avoided endorsing
"privatization", it is clear from the report as well as from committee discussion and the list of questions soliciting responses to the
report that the Committee is predisposed toward "reforms" that include a substantial privatization component. Critics have
rightly questioned the overall tone of the report, which exaggerates the program's financial and demographic problems to be
faced in the future. For their part, the Co-Chairs have labeled their critics "know-nothings" and "Luddites". We believe the
critics have pointed to real deficiencies in the report and urge that Congress seek a broad range of ideas and proposals,
soliciting a more thorough analysis before it changes a popular and essential public program.

The Commissioners have attempted to move forward the date on which Social Security faces its first "funding gap", from the
previously accepted date of 2038 to 2016, contributing in great measure to the urgency apparent throughout the report. Much
of the discussion of the report has centered around the program's Trust Funds, with many Democrats objecting to the
Commission's claim that they are little more than an accounting gimmick that cannot really provide the Treasury with funds to
pay retirees in the future. Even some economists have revived Candidate Gore's proposal for "lock-boxes" to preserve the
Trust Funds for use after 2016. We believe that it is unfortunate that discussion has become sidelined by the debate about the
Trust Funds. While it is true that they cannot be a source of funding to the Treasury (and they were never designed to be a
source of general revenue to the Treasury), the notion that the Treasury may not be able to make good on its promises to
Social Security cannot be taken any more seriously than a claim that the Treasury will default on its debt held in private hands.

As the report makes clear, the entire Social Security program today absorbs about 5% of GDP, and this will rise to about 7%
of GDP over the next 60 years. To achieve the necessary two percentage-point increase of GDP going to Social Security will
require an increase of the payroll tax from today's 12.4% to 19.3% in 2075. This is the "financial" half of the justification for
claiming that Social Security is unsustainable. However, what the Commissioners fail to acknowledge is that over the past 60
years, Social Security grew from zero percent of GDP to the present 5% (and from 0% of payroll to 12.4%), without
engendering any crises. On this basis, it is surely an exaggeration to claim that our nation cannot devote 2% more of its GDP
toward Social Security programs. The coming decades will provide plenty of time to discuss the appropriate manner of
achieving such a shift-raising payroll taxes is not the only, and probably not the best, way to accomplish this. Given that the
number of retirees relative to the number of workers will rise (and given a shrinking percent of national income that is subject to
the payroll tax), the financial burden should probably be more widely shared. This can be achieved through a broadening of the
Social Security tax base-for example by eliminating the wage cap subject to the tax, or by taxing nonwage income.

This brings us to the "real" burden of supporting future beneficiaries. Today, as the report emphasizes, we have three workers
for every retiree; this will gradually fall to only two workers per retiree. Those are the "facts" of the unsustainability of Social
Security with respect to the ability of tomorrow's workers to bear a rising burden of producing real goods and services to be
consumed by retirees. However, as the report also makes clear, in 1940 there were 42 workers per retiree, which fell to five
workers per retiree by 1960 and to the current three workers per retiree. Thus, over the past 60 years that ratio has fallen from
42 to three, and over that span of time, the real living standard of workers has increased significantly. Further, when one adds
together the over-age-65 population and the under-age-18 population, the average worker in 1965 supported more
"dependents" than a worker will support through the next 75 years. Again, the rising "real" burden on workers does not appear
to approach crisis proportions. So long as worker productivity rises-even at the relatively low average growth rates seen since
1973-workers of the future will enjoy higher real living standards even as they support more retirees.

Finally, while it should be apparent that a Trust Fund cannot help to reduce future financial burdens or real burdens, it should be
just as obvious that privatization cannot help, either. Even leaving aside the obvious questions about volatility of financial
markets as well as substantial management fees that reduce returns, society does not and cannot provide for its future through
such financial means. Tomorrow's workers will have to provide the goods and services required by tomorrow's retirees. Note
that no amount of privatization can reduce the amount of GDP that will need to be shifted. Even if tomorrow's retirees were to
hold financial assets that provide greater monthly income than retirees would have had in the absence of Social Security
"reform", this will not directly reduce the burden on tomorrow's workers. Indeed, it will increase the burden if it succeeds in
raising real living standards of future retirees. Of course, some claim that privatization today will lead to a higher growth path by
leading to more saving and investing, and thereby reducing the real burden tomorrow. However, economists are divided on the
best ways to encourage such investment, with many doubting that reforms centered around privatization could lead to a net
increase of national saving. In any case, the government has at its disposal a wide variety of other methods of encouraging
saving and investment-from favorable tax treatment of personal savings accounts and capital purchases to direct support of
investment (for example, through provision of funding for R&D and for public infrastructure). There is no need to change the
basic structure of Social Security to achieve such national, macroeconomic, goals.

For the past six decades Social Security has served us well, providing a system of social assurance that guarantees a minimum
standard of living for the retired, for survivors, and for disabled workers. Social Security is one of the most effective and
comprehensive social assurance programs in the world. It is a bulwark of our economy, providing strong and stable source of
employment in meeting the needs of our elderly population, while relieving younger families of much of the financial burden that
private care of the elderly would otherwise impose. With only comparatively small adjustments that might be required in the
future, Social Security will serve us well for another six decades and more.