Dear Elizabeth: The Dog Ate Your Social Security

On Apr. 28, President Clinton was asked if Social Security was going broke. He said no. To prove it, he promised to write to "everybody in the country every year on their Social Security account: 'Here's what's in it. Here's how much money it's earned. Here's what you can look forward to getting out.'" Clinton pledged a letter "within the next four or five years," safely past the 1996 election. No fool, he. Still, telling the truth about Social Security would be unprecedented for politicians. Could it be done? I decided to try it myself, in a letter to my 7-year-old daughter:

Dear Elizabeth,

Pay attention, Sweetheart, because this gets complicated. Even the President gets it wrong. I'm very sorry, but there's no money in your Social Security account and never will be. That's because no one has her own Social Security account. Instead, people send 7.6% of their pay to Washington, their bosses match it, and it's spent right away paying Social Security and medical benefits to older folks. And what's left over is spent on other important things, such as aircraft carriers, national parks, and foreign travel for members of Congress.

Meanwhile, the Treasury Dept., which pays all the government's bills, replaces the money it borrows with ious. Of course, the Treasury Dept. has to pay interest. So it just sends more ious to the Trust Fund. That's how the Trust Fund is really "invested"--in ious, to be paid by future taxpayers. That's you!

All this will change in 2013, when you turn 26. That's when the first wave of Baby Boomers--including me--starts retiring. Since there are so many of us, there won't be enough money coming in from payroll taxes to pay for our retirement. So you'll have to start paying back the ious through your regular income tax. Then you'll pay for my retirement through your regular Social Security payroll tax. Whew! Your tax rates will have to be pretty high! I hope you'll feel my generation spent your money wisely.

Love, Dad

Actually, according to the latest annual report of the Social Security Trustees, the reality is even worse. Both the Disability and Medicare funds run by the system will go bust in 1995 and 2001, respectively, unless they're bailed out. The report's rosy outlook assumes the economy will grow every year without a downturn through 2070. And unemployment will stay around 6%. Inflation? Never higher than 4%.

But the report admits financing could get a lot tougher if the economy slips into recession. If such downturns were to occur in 1995 and 1998, the Trust Fund will run into a cash-flow problem in '98. Income taxes will have to be raised or other programs cut to pay retirees. And payroll taxes eventually would have to double. Of course, the government could try to borrow the difference and shift the burden onto the next generation.

Get real. Such solutions, however, aren't very popular on Capitol Hill just now. Recently, House Ways & Means Chairman Dan Rostenkowski (D-Ill.) proposed a benefit cut plus a tax hike to fix things. But higher taxes make up most of the package; the mild benefit cuts are phased in over 50 years. Senate Finance Committee Chairman Daniel P. Moynihan (D-N.Y.) favors removing the Social Security Administration from the Health & Human Services Dept. Hardly a solution.

Unfortunately, politicians lack the courage to propose curbing benefits for affluent retirees and raising the retirement age--the only realistic solutions. But Boomers beware: Elizabeth and her pals one day will discover the truth about Social Security. And they won't like paying double taxes to fund their parents' greens fees. So, Clinton's letter ultimately could force the most radical change of all--a complete overhaul of the system.