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The Providence Visitor, August, 2000

There continues to be a great deal of debate about Social Security. Is it sound financially? Are the young today being shortchanged? Should we allow individuals to direct part of their contributions to stock market investments, allowing the rate of return on their money to be higher than it otherwise would be?

All of these are valid concerns. In fact, the number of potential  "negatives" concerning the future of Social Security seems to far outpace the positives. Life expectancy, which is a fundamental determinant of the amount of benefits paid, is expected to continue growing. In 1940, for example, life expectancy was 63.6 years. By 1998, this figure had risen to 76.7 years. Projections for 2030 place life expectancy at just under 80 years. As the "average" retiree receives Social Security benefits for a greater number of years, our ability of finance this system in its current "pay as you go" fashion appears to be highly questionable. Add to this the fact that the number of workers supporting each beneficiary continues to decline, and it is no surprise that so many persons expect Social Security to be bankrupt in fewer than two decades.

Before concluding that bankruptcy is inevitable, however, other factors must be considered. First, as life expectancy continues to rise, expect the age at which full Social Security benefits are received to increase. Current proposals anticipate retirement age rising from 65 to age 70 by 2029. Also,  in the information-based economy, as worker productivity continues to rise, so too will real incomes, indicating that it will not be necessary to have the same number of workers to sustain this program.

But even with these potential positives, what about the rate of return young persons today will receive? The answer to that question under the current "pay as you go" system is that our young will receive very low rates of return. Note that I did not include the phrase "on this investment." This, I feel, is where the thinking about Social Security needs a reality check.

Ask anyone and you will hear the conclusion as if it is a virtual certainty that if they were allowed to place some of their Social Security contributions into the stock market, the return would be higher. This is understandable, as we are now in the longest economic recovery in history, and the technological revolution we are now witnessing has generated large and persistent capital gains. What would those same persons be saying if the stock market were stuck in a "trading range" for several years? How willing would they be to invest this way if we were in a prolonged recession?

Social Security should not be viewed as an investment, even though it seems that we should. And, investment does not merely consist of stocks, bonds, and real estate. The best way to enhance retirement income, and, along the way, career earnings, is by augmenting one's human capital, through education, training, and the continual acquisition of marketable skills. This should be viewed as the most important investment any person makes. In a knowledge-based economy, maintaining one's human capital is the most effective method of planning for retirement.

So, extreme optimism, the natural outgrowth of a strong national economy and a booming stock market, has made the upside of investing seem virtually endless and large returns all but certain. As far as I can tell, we are likely overstating the positives, since we have no experience with persons investing their contributions in the stock market, but we are very familiar with the litany of negatives and their likely effects. Maybe it would be helpful to ask: "What ever happened to all the day traders and the high-flying .com's? How sure can we be that this won't happen to large numbers of persons if the investing of Social Security contributions is permitted?

Like it or not, Social Security isn't going away. Nor can the government ever allow it go bankrupt. Perhaps the best rule to keep in mind at the present time when assessing the future of Social Security is one of my favorite quotes: "Certainty is an illusion."

by Leonard Lardaro

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