Strengthening and Securing Social Security

Source: AARP Press Center |  | January 31, 2005

Strengthening and Securing Social Security

Social Security Forums in Hawaii

Marie F. Smith
President, AARP
January 2005

In these days of heightened insecurity, the last thing Hawaiians deserve is a threat to their own future financial security – and a threat to one of the most successful programs in U.S. history.

Yet as we stand here today, Social Security stands in the line of fire. There is a lot of misinformation being shot out of Washington. The first thing we need to know is that – despite everything we may have heard – Social Security today is strong. That's right! The program is not in crisis. It's not going broke. The trust fund will be large enough to pay 100 percent of promised benefits through 2042 – when the youngest of the baby boomers will be 78 years of age!

After 2042, if no changes are made, fully 70 percent of promised benefits could still be paid. So, what we need to do now is to take steps to strengthen Social Security's long-term solvency to ensure that full benefits can be paid beyond 2042. We want to guarantee full Social Security benefits for all future generations. But there is a right way and a wrong way.

The wrong way is to take some of the hard-earned money workers pay into Social Security and divert it into private accounts. AARP is firmly opposed to private accounts that divert money from Social Security payroll obligations. Such private accounts won't help Social Security's long-term financial Security and they won't help the future retirement security of today's younger workers.

Why? Because benefits to current beneficiaries still must be paid, even though there would be less revenue due to the diversion of payroll taxes into private accounts. So, extensive national borrowing would be required to meet these obligations, resulting in higher interest rates and additional interest payments. On top of that, the borrowing to fund an extended transition period would equal as much as $2 trillion over 10 years. At a time when deficit figures are already at record numbers, it makes no sense.

And let's not forget – private accounts can lose money just as fast as they can make it. Those of us who've watched the stock market in the last few years know that "what goes up can certainly come down." What if you needed to retire when the market was down and your private account was down with it? Do we really want to take that gamble?

Social Security is the only guaranteed, inflation-proof, lifelong benefit that millions of workers – present and future – can count on. We should not be talking about replacing this rock solid guarantee with a risky gamble.

AARP believes there are better ways to ensure Social Security's long-term solvency and we will wage the fight of our lives to ensure that the only guaranteed source of retirement security for America's families is not put at risk needlessly.

This is – first and foremost – a question of values. Prior to the creation of Social Security in 1935, older Americans were our poorest and the most neglected population. President Franklin Roosevelt – along with millions of others – believed that this was not worthy of our great nation. They declared that those who fought our wars and gave a lifetime of service to their families and communities should not have to face poverty in old age. And so they made a promise to working Americans and retirees.

I believe that our Social Security promise embodies our deepest values as Americans – our obligations to one another – our obligations between generations – between parents and children – between grandparents and grandchildren – between those in retirement and those at work – between the able-bodied and the disabled. The promise of Social Security has endured for 70 years and I don't believe we should be putting an expiration date on it now.

Today, there are four pillars to retirement security – but only one that is guaranteed – Social Security. The others pillars are: pensions and savings; continued earnings; and health insurance. And, the fact is: the guaranteed benefits of today's Social Security program will be even more important to the baby boomers and to those who follow them – than they are for today's retirees!

That's right. Less than half of today's working Americans have a pension plan where they work. Personal savings are at an all-time low. The average older American already spends nearly a third of his or her income on health care. And although many older Americans are having to work longer, age discrimination and a weak job market limit what they can earn.

Social Security today supplies nearly half of the income for many older Americans. The percentages are even higher for minority populations. And for one out of every three beneficiaries, especially older women, Social Security is all that stands between them and living in poverty.

Ladies and gentlemen, the last thing we need is a risky and enormously expensive overhaul of Social Security. I've said that creating private accounts funded with money diverted from Social Security is the wrong way to deal with a projected shortfall that is projected for decades from now. But what is the right way?

Once we put aside the nonstarter of taking money out of Social Security to fund private accounts, we need to have an honest debate about the serious options available to us. Here are just two examples of options we should explore:

One option would be to increase the wage base for Social Security contributions. Currently, the maximum wage subject to Social Security payments is $90,000. Raising that cap to $140,000 (phased-in over 10 years) would lower Social Security's projected long-term shortfall by 43 percent. This would be fair because higher wage earners have recently benefited from substantial tax cuts and other subsidies for their investment and retirement accounts.

Another option would be to diversify Social Security's Trust Fund investments to increase the likelihood of higher returns. Today, the Trust Fund can only be invested in special Treasury bonds, similar to the Treasury certificates of deposit that you or I can buy. These are safe investments, but they have a modest rate of return – currently about 4.4 percent.

Investing some of these funds in a broad stock index fund – as most other pension systems do – could yield higher returns. This would spread the risk across the whole population and all generations, unlike private accounts. Administrative costs would be far less than they would be for millions of personal accounts. Diversifying investments in this way could lower the expected shortfall by 15 percent.

So, taken together, just those two steps would lower Social Security's long-term shortfall by well over half – 58 percent – and that is just for starters. There are other options – options that fall far short of gambling with risky private accounts – that could strengthen the program even more.

Some people are trying to present the idea of private accounts in fancy wrapping and colorful ribbons. They are promoting a kind of "free lunch" – Social Security changes that somehow seem to pay for themselves. But, we should remember: All that glitters is not gold!

These plans could easily leave you, your children and grandchildren with more debt, less security, and quite possibly, less income. That's a broken promise that we cannot afford to accept.

There is a lot at stake in this debate. As I've noted, the trillions of dollars it would cost to transition to a private account system may well lead to higher interest rates that will squeeze the federal budget.

The result would be higher taxes and higher interest costs for everyone. This clearly would be bad for the economy, bad for family budgets, and bad for future generations of Americans.

Let me be clear: AARP is not against private savings and investment accounts when they're funded by you and, hopefully, your employer. Such private accounts are an excellent savings tool, but in addition to Social Security, not in place of Social Security.

It is extremely important that our children and grandchildren begin now setting money aside to invest and save for their retirement. Knowing they can count on Social Security's guaranteed benefits, they can make their investment choices with greater peace of mind. But, under no circumstances should we weaken Social Security by taking money from it to create private accounts.

And, let me be clear about something else. AARP's opposition to private accounts funded by Social Security is not a liberal position, or a conservative position, or a Republican position, or a Democrat position – it's a common-sense position that can and should be supported by people of all political persuasions and ideologies who care about the future retirement security of our children and grandchildren.

Let's ask ourselves two important questions:

As a nation that claims to value the well-being, dignity and security of every citizen, do we really want to abandon those principles and leave millions of older Americans to fend for themselves?

And, as a nation that has always recognized that a house divided cannot stand, do we really want to use Social Security as a generational dividing line, pitting old against young?

President Franklin Roosevelt said – during his radio address on Social Security's third anniversary:

"…In our efforts to provide security for all American people, let us not allow ourselves to be misled by those who advocate short cuts to Utopia or fantastic financial schemes."

My friends, with your help, we will strengthen Social Security and keep its promise now and for generations to come.

Thank you.