No. 2 May 21, 1998

President Clinton recently reported that Social Security trust fund’s projected insolvency date has been postponed by three years—until 2032. As the debate on the best way to reform this troubled system heats up, Californians will have a big stake in the reform that is eventually adopted.

According to the U.S. Department of Labor, California has more than 15 million workers, the largest civilian labor force in the country paying more federal individual and employment taxes than 23 other states combined.

Today’s workers pay today’s Social Security benefits, and because there are fewer workers per retiree, the current Social Security system is unsustainable in its current form. Earlier this week, government actuaries reported that the program’s trust fund will be insolvent by 2032.

Former U.S. House Speaker Tip O’Neill once stated that “Social Security is the third rail of American politics. Touch it and you die.” But as Americans become increasingly concerned about their own prospects for retirement, lawmakers who fail to address Social Security should expect nothing short of political death.

Politicians on both sides of the aisle now admit that dramatic reforms are necessary to preserve the retirement security of future workers. Californians do not fare particularly well under today’s Social Security system.

The Heritage Center for Data Analysis in Washington, D.C. has conducted a preliminary state-by-state analysis to find out how each state’s average wage workers will fare under the current system. The average-wage Californian born in 1975 can only expect to receive between .55 and 2.67 percent return on their lifetime contributions to the Social Security system (see table). Nationally, California workers will rank average to below average when compared to the rest of the nation. These estimates are optimistic. An economic downturn or higher payroll taxes will drive the returns even lower.

Defenders of the current program maintain that Social Security is an insurance against old-age poverty where rates of return are irrelevant. This “insurance,” however, will come with a high price tag for future generations, it will force a greater reliance on the system as the sole source of income for more low-income seniors, and it will continue to prevent wealth creation for California families.

Indeed, the combined employer and employee payroll taxes for the Old-Age and Survivors Insurance (OASI), or Social Security, are now 10.7 percent. The payroll taxes required to keep the system solvent could reach almost 20 percent of taxable payroll within the next 50 years. While this may seem a long way off, consider that today’s children could be paying almost one of every five dollars earned to keep the Social Security system afloat. And that does not include federal and state income taxes, Medicare payroll taxes, and sales taxes.

Furthermore, additional payroll tax increases, currently being considered by some Members of Congress, would only serve to further crowd out private retirement savings. Here’s how:

As payroll taxes rise, less money is available for individual’s private retirement savings; and with less private retirement savings, there is a greater reliance on the troubled Social Security system. This “crowd out” effect is particularly detrimental to low-income workers. According to Michael Tanner of the Washington, D.C.-based Cato Institute, low-wage workers already rely on Social Security for 81 percent of their retirement income. Many California seniors already rely on Social Security as their sole source of retirement income.

Finally, because there is no right to one’s Social Security contributions, as determined by the U.S. Supreme Court in 1960, there is no guarantee to a Social Security benefit. All benefits paid are based on a political decision to do so—not a legal one. Fortunately, there is hope.

Lawmakers in Congress have developed several partial and full privatization plans. These proposals would allow workers to divert their Social Security payroll taxes, or a portion of them, into private investment accounts. These plans include provisions to continue providing Social Security benefits for those who currently rely on Social Security or are already vested in the system and, in some cases, would provide a guaranteed minimum monthly benefit.

According to Senator Daniel Patrick Moynihan (D-NY), who supports a partial privatization option, “With this investment provision, workers can build up estates. The fellow who worked at Bethlehem Steel for 40 years would not just have a pension, an annuity, but could leave substantial amounts of money to his children...”

Low-income workers, who have historically been excluded from wealth accumulation and capital formation, would now find tremendous opportunities for themselves and for their children. For most Californians, even very low-risk investments, such as U.S. Treasury bills, would provide a more secure retirement than the current system. The current Social Security reform discussions will ultimately lead to reforms that will have a significant impact on Californians.

With so much at stake for our state, Californians must educate themselves and make themselves heard on this important issue. As we lead the nation in so many areas, we should be prepared to lead the debate on this issue with innovative and effective solutions.

For additional information, contact Naomi Lopez at (415) 989-0833.