THE NATIONAL RETIREMENT SYSTEM NEEDS A FACELIFT — A NIP OF COLA HERE AND A STRETCH OF RETIREMENT AGE THERE — NOT THE HEART TRANSPLANT OF INDIVIDUAL ACCOUNTS: GET OFF THE DIME AND FIX SOCIAL SECURITY

It’s amazing how people tend to take leave of their common sense when it comes to reforming Social Security. We read and hear a lot these days about changing the system so that everyone has his or her own Social Security account: Monies contributed by workers and employers would go into each worker’s own account, rather than into one commingled fund. What could be fairer than that? Nothing, if you don’t mind that it would rip the Social Security safety net to shreds.

Anyone who advocates changing Social Security should understand how and why the system operates as it does. Lower-paid workers have gotten a disproportionately large return from Social Security since it began in 1936. That’s because the system was designed as a welfare program, not a retirement plan; as such, it deliberately discriminates against higher-income people in favor of those at the lower end of the wage scale.

Thus, a person who earns $20,000 a year will receive Social Security benefits equal to 47% of that amount. For someone making $60,000, Social Security pays only about 27%.

It doesn’t take a degree in rocket science to realize that if all or even part of the contributions made for higher-paid workers went into their own accounts, lower-paid workers would get much less than they’re now receiving. And how would they react to that? It’s not being alarmist to say that there might be mass riots in the streets and an outbreak of class warfare.

So where’s the common sense in this separate account proposal? It was lost in the zealotry of the reformers. . . and perhaps also in the greed of those who would love to manage those billions of dollars of annual Social Security contributions.

Backers of the individual-account proposal also seem to be unaware of another key feature of Social Security: the benefit paid to children of workers who die. Those benefits are paid until the children are 18, regardless of how much the parent contributed to Social Security.

But under a “pure” individual-account system, all that would be available for the kids would be the amount accumulated in the parent’s account. A young family with two children, and two parents earning about $30,000 a year each, currently can expect to receive around $1,800 a month from Social Security if a working parent should die. If all of that parent’s Social Security taxes were put into an individual account plan earning 8% a year, the monthly death benefit paid under the same terms as the current Social Security benefits would be less than $600.

Perhaps the biggest problem in switching to individual accounts would be that active workers would have to pay for the benefits of two generations.

“How’s that?” you say.

Stop and think. The Social Security benefits of today’s retirees are being paid by today’s active workers, right? After all, the retirement benefits being paid are merely “transfers” from employed individuals’ Social Security contributions, and current retirement benefits will continue to be payable to those already entitled even if the system is converted to an individual-account system.

So, while today’s workers are paying the benefits of the previous generation, they will also have to be funding their own retirement through contributions to their separate Social Security individual account.

A pretty bleak prospect, wouldn’t you agree? It will be many decades before all present-day retirees die off and even longer before adequate benefits build up in future retirees’ individual accounts. Once present-day workers realize the effects of adopting a separate-accounting system, how many would be willing to pay the penalty of reduced benefits and/or increased contributions?

Another place where common sense seems to be lacking is in the criticism that the system discriminates against women. That is demonstrably untrue, and it’s disturbing that those who make such claims are deliberately ignoring a key fact of life and death.

It’s well known that a worker’s sex is not a factor in determining the amount of Social Security contributions made by or for that individual. The same goes for the amount of benefits payable on a worker’s retirement.

What the critics don’t acknowledge is that women ultimately get a lot more out of Social Security than men. And why is that? Because women, as a group, live longer than men.

Consider this hypothetical but typical example: Jane D. and John J. both retire at age 65 after having worked for 45 years. Both had average annual earnings of about $40,000, and both will get Social Security benefits of around $14,000 a year.

John J.’s life expectancy is about 15 years, during which he can expect to get Social Security benefits of $210,000 in 1998 dollars, but Jane can expect to live at least five years longer, drawing a total of $280,000 — a third more than John J. That’s discrimination, any way you look at it.

The proponents of individual accounts also fail to address this issue: If John J. and Jane D. were to be covered solely by such a system, Jane would receive 10% less in benefits each year because of her greater life expectancy.

I will readily concede that Social Security needs help if it is going to survive. But it doesn’t need the equivalent of open-heart surgery. The patient can recover with a simple change of diet — a diet COLA.

keep cola a point under index

The COLA, or cost-of-living adjustment, is the biggest single factor that’s causing Social Security liabilities to balloon out of control. Back in the late 1970s, the size of the COLAs was stupendous — as large as 13?%. As a result, the Social Security benefits of some retirees doubled within eight years.

Simply by limiting the adjustment to one percentage point less than the increase in the cost-of-living index, the annual increase in Social Security liabilities could be reduced by more than $5 billion a year.

The other obvious way to help would be to raise the retirement age to 70. When Social Security was established in 1936, few people lived much past 65 and those who did couldn’t work much longer. Today that’s no longer true.

Recently, the National Commission on Retirement Policy issued the “21st Century Retirement Security Plan,” and while some of its recommendations should be applauded, the plan is shortsighted and will ultimately fail.

The plan fails to address the COLA issue and also ignores its effect on disability benefits, which presently account for about one-seventh of Social Security expenditure. Finally, the report relies heavily on an “individual-account” benefit from a 2%-of-payroll-tax redistribution. For reasons explained above, this is just the camel pushing its nose under the tent.

In summary, there’s no need to roll Social Security into the operating room for major surgery. A little disciplinary action, in the form of a diet COLA and an increase in the retirement eligibility age, will keep the patient alive and doing its job.

Rick G. Mayo is senior vice president and chief operating officer of McGinn Actuaries Ltd. in Anaheim, Calif.