by Jerome F. Winzig
The cover page of the Fall 2004 issue of Thrivent, a magazine published by Thrivent Financial for Lutherans, reads, "Who needs to be a millionaire?" Their answer? You do, for retirement. They suggest various total investments you'll need if you want to retire with a monthly income of $4,800 at age 65 and you live to be 90. If you're retiring today, you'll need $832,000. If you're retiring in 2024, you'll need $1.6 million by retirement, and if you're retiring in 2034 you'll need $2.2 million.
Most Americans, of course, don't save anything approaching these amounts. According to the U.S. Department of Commerce, in 1998 the average American's savings rate dropped to one-half of one percent of disposable personal income, the lowest rate since 1933 during the Great Depression. In 1999, it declined to a negative 1.1 percent, meaning the average American spent more than he or she earned. By 2003, it had risen somewhat, but was still an anemic 2 percent.
Many Americans are saving little or nothing for retirement, and instead will end up relying on social security for their retirement income. So how much does the Social Security Administration have invested for the 47 million people currently receiving social security benefits (33 million retirees, 7 million survivors of deceased workers, and 8 million disabled workers and their dependent), and the tens of millions of Americans who will retire in the coming years. If SSA had invested an inadequate $100,000 for each current retiree (ignoring all those about to retire), it would have $3.3 trillion in investments.
So, how much does it have invested? Nothing. Nada. Zero.
Now, some might disagree and say there are $1,531 billion in the social security trust funds. That's far less than what's needed. But where is even that money? Ever since the U.S. Treasury began to collect more in social security taxes than it pays out in the mid-1980s, it has been loaning that money to the federal government, which has spent it. In other words, the Social Security Administration can only collect money from its trust funds if the federal government raises our taxes and uses the proceeds to pay back what it owes to the trust funds.
What would happen to a private pension fund that had zero investments and depended on payments from current workers to pay current retirees? The trustees of that pension fund would be in jail and the pension fund would be in bankruptcy.
This has all been substantially documented for many years. Earlier this year, Lawrence J. Kotlikoff and Scott Burns wrote about it in their book, The Coming Generational Storm: What You Need to Know about America's Economic Future. They say, "For over half a century, ardent discussions of budget balance have been used as a cover for what is really happening: a massive redistribution from young and future Americans to currently living adults. Our de facto generational policy has been to indulge the present at the expense of children living and unborn."
Kotlikoff and Burns point out that, according to analysts at the Department of Treasury, the Office of Management and Budget, and the Federal Reserve, we need to immediately raise all federal personal and corporate taxes by 69 percent to fully fund our current commitments to social security and avoid leaving the bill for our children. That information was included in President George W. Bush's Fiscal Year 2004 Budget until it was yanked a few weeks before publication last year.
The prospects for reform are just as non-existent this year. In his acceptance speech at the Democratic convention, Senator John Kerry said, "I will not privatize Social Security. I will not cut benefits." He also said, "[W]e won't raise taxes on the middle class." In other words, let's just stick our heads in the sand and ignore the problem.
Each year we delay, however, the future crisis worsens. When Social Security was first signed into law in 1935 and benefits were small, the average life expectancy at birth in the United States was around 60. Today life expectancy is over 77 while benefits are significantly larger and are indexed for inflation.
It is a problem that will not go away. It comes to a head in less than ten years. All the presidential candidates know it. All the members of Congress know it. We all know it, or we should. For years now, our annual individual Social Security Statements have warned us about the future funding crisis in these words: "[T]he Social Security system is facing serious future financial problems, and action is needed soon to make sure that the system is sound when today's younger workers are ready for retirement."
Our response has been to ignore the problem, spend too much, and save too little. In the not-too-distant-future, we may face intergenerational rioting in the streets when we try to hand our children and grandchildren the bills for our own retirement.