A frequent lecturer on the future of Social Security, State Street Boston Corp. chief executive Marshall N. Carter has emerged as one of the most outspoken proponents of privatizing the current system. In a speech to the Boston business community last week, Mr. Carter laid out his arguments for reform, arguing that at least some Social Security funds should be invested privately. The following is excerpted from that speech.
The aging of our population and the approach of the 76-million-strong baby boom generation toward retirement age has dropped the Social Security ratio from 16 active workers supporting one retiree in 1950 to 3-1 today - heading toward a 2-1 ratio early in the next century.
So another cornerstone of American life, a reasonably financially secure retirement, is not looking too secure. Today, 63% of retirees on Social Security depend on the program for half or more of their income.
Social Security has been one of the most effective and best run programs in American history. More, it has been a noble program - with great achievements in ending the scourge of elderly poverty in our country. But if we mean to keep Social Security's promise of a dignified retirement for all, we simply must face up to changing circumstances - and adapt.
The problem for the future is that Social Security is a pay-as-you-go system - in that the money that today's workers pay through their payroll deductions goes directly to current retirees - and to current government spending - not real investments. Money "borrowed" from the system's trust funds is matched by IOUs from the Treasury.
The basic problem with Social Security going forward is the large bulge of people in the baby boom who will have to be supported by the smaller generations behind them. At the same time, people want to retire earlier and the worker-to-retiree ratio is dropping quickly. This means that in about 15 or 16 years the Social Security System will be paying out more money than it takes in through payroll taxes.
When the system was designed, no one anticipated this kind of vast demographic change. In fact, when the initial retirement age was set at 65, the average life expectancy in America was 61!
Today, Social Security is such a bad deal for younger workers that if the system is not changed and current projections hold, they will actually receive less money in Social Security than they paid in taxes. In fact, a recent poll revealed that more Americans aged 17 to 34 believe in UFOs than believe they will ever see returns from Social Security.
Through the years, Congress has already altered Social Security more than 20 times by raising the tax rate - but it has not addressed the fundamental issue. Changes such as raising the age of retirement, stopping cost-of-living increases, income means-testing, raising taxes, and cutting benefits only delay the inevitable demographic day of reckoning - they do not solve the problem.
Worse, those changes could mean deferring retirement, lower benefits, and a possible crushing burden of taxation on our children and grandchildren.
In "Promises to Keep," the book that my colleague at State Street Bill Shipman and I have written, we enunciate three principles that we consider essential to any solution:
First, the elderly - and those near retirement - must be able to retire with genuine financial security.
Second, younger Americans must be allowed to keep more of the fruits of their labor.
And third, America's economy must not be unreasonably burdened in meeting the first two principles.
Reforms engaging private investment - or partial private investment - of Social Security retirement funds can meet all three of these criteria.
Such reform could provide retirees with the funds they need for a secure retirement without placing an onerous tax burden on generations to come and without dragging down the U.S. economy. Investments could be everything from bank CDs to international stocks and bonds.
The plan that we and others propose would call for optional establishment of what we call "Personal Social Security Accounts."
Each worker would set up such an account - and rather than paying the employee portion of the Social Security tax, would pay into his or her own mandatory savings account.
The assets in that account would then be invested in CDs, guaranteed investment contracts, stocks, bonds, mutual funds - whatever the worker chose under some prudent guidelines. Unlike 401(k)s - and similar to Social Security - these savings would not be available for anything other than retirement.
For years, free and open debate about Social Security has been difficult. For years, the issue has been considered the third rail or taboo subject of American politics - touch it and your career is over.
But something remarkable has happened in the past year or so. The unspoken prohibition against honest discussion of Social Security has been lifted. And that, I believe, constitutes a fundamental alteration of the American political landscape.
The most significant indication of all that the environment has changed is the report from the Advisory Council on Social Security. Preliminary findings from the report were leaked to the press in March, and the final report is due out sometime in the fall - possibly sometime after the elections.
The 13 members of the council have proposed three different options for solving the Social Security problem. But all three agree that we must invest some Social Security revenue in private markets.
And public opinion is moving. A poll conducted in June by Public Opinion Strategies found that seven out of 10 "Generation X-ers" think Social Security will not be there for them when they retire.
The survey found that a majority of Americans under age 45 - both Democrats and Republicans - believe that major changes are needed in Social Security.
And a majority in a Gallup poll conducted last year said they believed that they would have more money for retirement by investing in markets than from Social Security.
For me, Social Security's future - and the need for a real debate- is an issue where we have an overriding corporate responsibility to play a role.
Why? Because this is one of the most pressing social, economic, and political issues of our time. And it is an issue we know and understand inside and out. State Street has been in the business of investing for retirement for more than 200 years. We know the problem. We see its manifestations throughout the world as we do business in 75 countries in 40 currencies.
We believe we understand the financial, political, and demographic issues that are simultaneously exerting pressure on retirement systems around the globe. We have written the book and we are speaking out on the issue because I firmly believe that if we can help to promote education on the issue we will be contributing to a solution.
And not only in this country, but in nations throughout the world, as well.
Our company's view of markets is a global one and it is clear to me that private investment would be of great benefit not only to workers in the U.S., but also to workers in dozens of countries throughout the world whose pay-as-you-go public pension systems are also under pressure.