President Bush has stated that Social Security is in
trouble and that the problem needs to be addressed immediately. This sense of
urgency is reminiscent of what he said about Saddam Hussein and Iraq. Is there
an urgent need to fix Social Security and is Bush's solution of privatization
the best alternative?
The Social Security Act was passed in 1935. In addition to normal retirement
benefits it has been modified to include disabled workers and automatic cost-of-living
increases. Social Security or payroll taxes are almost exclusively collected
against wages earned by working people. Social Security derives no income from
people having large real estate holdings or investment portfolios. Social Security
is a regressive tax, meaning that people on the low end of the scale pay an
equal or greater percentage of the earned income than those at the top. For
the year 2004, no payroll taxes were collected on wages above $87,900. It is
estimated that 80 percent of Americans pay more in payroll taxes than they do
in federal income taxes. Every American, single or married, pays the same percentage
of their wages (6.2% + a 6.2% match from their employer, or 12.4% if self-employed)
up to the current limit of $87,900.
During all of its years, Social Security only ran a deficit for 14 of those
years. Eight of those years were from 1975 to 1983. Because of those deficits,
President Reagan and the Congress were forced to act in 1983. While Reagan was
widely remembered as having cut income taxes, he raised payroll taxes so much
that, from deficits for eight straight years, the Social Security system was
projected to remain solvent for the next 40 to 50 years.
Outlook for Social Security
In 2004, the Trustees Report of the SSA (Social Security Administration) projected
that the Social Security Trust Fund (SSTF) would remain solvent (i.e., will
be able to pay out full benefits to all eligible recipients) until 2042. In
2001, this estimate was more pessimistic and predicted insolvency in 2038. The
SSA uses conservative economic estimates for its projections. The Congressional
Budget Office, using its own estimates, projects the year for insolvency at
2052. In 2018, contributions into the SSTF will equal outgoing payments if interest
earned by surpluses in the SSTF is not included. At that time (2018), the funds
in the SSTF are estimated to be $5 trillion dollars. If interest on the funds
already accumulated in the SSTF is included, the year when funds in the SSTF
actually begin to decrease is 2028. At its peak in 2028, the money accumulated
in the SSTF is estimated to be $7.5 trillion. So what's the problem? Why the
sense of urgency?
The Biggest Threat to Social Security Are the Huge Budget Deficits Alan Greenspan
in his reports to Congress has consistently warned of the dangers of running
up huge budget deficits. Nearly everyone agrees that the large budget deficits
when combined with the large trade deficits, can not be sustained indefinitely.
Tax cuts, primarily for the rich, have been a large part of the huge deficits.
Greenspan had spoken against tax cuts because they increase the budget deficits.
Recently, however, Greenspan has said that he could support making Bush's tax
cuts permanent, but at the same time he also stated that the issue of entitlement
programs must be addressed. The entitlement programs he was talking about are
Medicaid, Medicare and Social Security. What Greenspan and others are basically
saying is that sustaining the tax cuts that President Bush has pushed through
will require cuts in Social Security and other entitlement programs.
The Social Security Trust Fund Has No Real Money
You are probably saying, wait a minute, you said the SSTF will have seven trillion
dollars of surplus in the year 2028. While there may be real gold in Fort Knox,
there is no real money in the SSTF, only IOUs. Payroll taxes are deposited regularly
into the SSTF and much of that money is used to pay benefits for retirees and
those with disabilities. But the government uses the surplus to pay for anything
in the general fund. Stuff like salaries for your Congressmen, roads and even
the war in Iraq. Technically, the government borrows the money and uses it to
purchase treasury bonds (it borrows from itself and pays itself back). It does
pay interest on the money it borrows from itself, but the interest earned on
treasury bonds is relatively low.
The situation is not unlike setting up a college fund for your child. Each week,
you take a percentage of your wages and make deposits into the fund. When it
is time for junior to go off to college, you break open the piggy bank, only
to find that your other self (your evil twin) has spent all the money but has
politely left you with a stack of IOUs.
Social Security Surpluses Are in Danger
The surplus in the SSTF has always been looked at as a 'Cash Cow' by the politicians.
The size of the deficits created by the government is actually much larger than
reported because the amount of the true deficit has been offset by the surplus
deposits in the SSTF and other intragovernmental accounts. The FY 2004 Financial
Report of the United States Government signed out by the Secretary of the Treasury,
John Snow, can be found at the following website:
Mr. Snow writes in the cover letter of the report (page 5 of the PDF document),
"I am pleased to present the fiscal year 2004 Financial Report of the United
States Government……. Total revenues less operating costs resulted in a net operating
cost of slightly more than $615 billion, down from $668 billion last year. The
budget deficit for 2004 was $412 billion. The primary component of the difference
between the budget deficit and the net operating cost was actuarial expenses
associated with post-retirement health care and pensions, and veterans' compensation."
When politicians fail to openly acknowledge the total amount of the debt, I
become suspicious of their intent to repay the full amount. Suppose, the parents
of the college-bound student said to him - things got a little tough and we
didn't have as much income as we expected and incurred more expenses so we had
to dip into your college fund; sorry about that. Will our government some day
tell us - we made the tax cuts permanent and eliminated the inheritance tax,
so we had to cut expenses somewhere; sorry about that.
The Perils of Privatization
President Bush wants to set aside funds for individual accounts for younger
workers. The amount set aside would be invested in the stock market or other
securities and managed by financial services firms. But to fund the private
accounts, a large amount of money (in excess of one trillion dollars) must be
borrowed. This concept is disturbing.
Can you find a reputable stock broker, who doesn't have a political agenda,
who would recommend that you borrow money (when you are already deeply in debt)
and then take that borrowed money and invest it in the stock market? I would
consider such a person unethical, greedy or possibly in dire financial straits,
desperately needing the brokerage commissions on the trades. But that is precisely
what Bush is recommending and guess, who the main beneficiaries would be - Wall
Street. Investing in stocks with part of your SAVINGS is a sound financial decision
for the long term. Even buying stocks on margin could be okay, if adequate reserves
are maintained should a margin call occur. But borrowing money, I don't think
I worked in the aerospace industry in the 1990s. After the Cold War, there was
considerable down-sizing and consolidation, and many employees were offered
early retirement. Because of incentives, some of those employees had invested
heavily in stock of the parent company. But the value of the stock fluctuated,
in some years by more than 50 percent. The lump-sum payout (and the lifetime
annuity) for retirees was considerably less than other times. Think of the market
in the last ten years. The only thing certain about the market is that it will
fluctuate, and that is not a good thing when picking a retirement date.
Managing private accounts has associated costs. If a management fee of one percent
of the total assets in the account is deducted each year, a 30-percent reduction
in assets over the life of the account could result. Bush has also stated that
individual accounts could be passed on to one's heirs. In 1940, the life expectancy
of Americans was 64 years. If you were born in 1940, you would turn 65 this
year. Many Americans born in 1940 made significant contributions from their
wages, but did not live long enough to draw benefits. These contributions were
not returned to the individual's heirs, but remained in the system. If the money
in private accounts is passed on to one's heirs, this could result in a serious
drain on overall assets from the Social Security system.
View Statements by the Administration with Skepticism
The accountants at Enron took liabilities and listed them as assets on Enron's
balance sheet. At a recent press conference, Scott McClellan, Bush's spokesman,
was asked about the huge debts that would be incurred to fund private Social
Security accounts. McClellan replied, "These aren't costs, they are savings."
Bush Determined to Cut Social Security Benefits
Bush will propose changing the method of computing benefits from wage indexing
to price indexing. In an article in the Washington Post published 4 Jan 2004
and titled Bush Plan Likely to Cut Initial Benefits by staff writers
Jonathan Weisman and Mike Allen, the authors state, "The Bush administration
has signaled that it will propose changing the formula that sets initial Social
Security benefit levels, cutting promised benefits by nearly a third in the
coming decades, according to several Republicans close to the White House."
For working-class people, like Joe Six-Pack, this has to be very disturbing
news. These people, whether they earned minimum wage or the maximum ($87,900
per year), have contributed 6.2 percent of their WAGES (emphasis on wages).
Since Social Security taxes are based directly on the amount of their wages,
so should their benefits be based accordingly on their wages or contributions
they paid into the system. Changing the way Social Security benefits are computed
is just a ploy to reduce the amount of benefits by as much as one third!
A Simple Solution
Many different methods have been proposed to fix Social Security in the long
term in addition to Bush's private accounts. These include raising the retirement
age, increasing payroll taxes or reducing benefits. None of the traditional
proposals, including private accounts, directly address the main issue: that
a larger and larger number of retirees are being supported by fewer and fewer
workers. People are living longer and healthier lives as illustrated by the
Life Expectancy data below. The data is for Americans of all races, both male
and female. Data is presented by year, with the corresponding life expectancy
for individuals born in that year.
Year - Age 1900 - 49 1910 - 51 1920 - 56 1930 - 59 1940 - 64
1950 - 68 1960 - 70 1970 - 71 1980 - 74 1990 - 75 2002 - 77
In 1940, shortly after Social Security was initiated, the life expectancy
was only 64 years. In 2002, it had increased by 13 years to 77. If the initial
retirement age in 1940 was increased by 13 years, it would be 78 today. The
decision that should be addressed by Americans is what percentage of our population
are we willing to provide with entitlement programs for the elderly (i.e.,
Social Security and Medicare)? It's unfair to ask our younger workers
to pay additional payroll taxes to support an ever-increasing percentage of
retirees. It's also unfair to ask retirees who have made contributions throughout
their working lives to accept reduced benefits. The issue of longer life spans
affects other things in our society besides Social Security. Mandatory retirement
ages, such as 60 years for airline pilots, and other related areas have not
been updated to recognize that people are living longer and are in better
Social Security is a contract from one generation to another. Let me repeat
that, because it is so important - Social Security is a contract from one
generation to another. It states, in unwritten language, that if you contribute
part of your hard-earned wages to support an elderly portion of our society,
younger workers in the future will do the same for you. The key is to determine
the proper percentage of retirees to the number of people of working age.
What is the proper percentage? In 2018, contributions from wage earners will
equal payments to retirees and those on disability. At this time, Social Security
would be self-sustaining. This would be a good time to set the needed benchmark.
In 2018, the age required for full retirement benefits will be 66. The percentage
of retirees (age 66 and older) versus total population of workers (ages 20
to 66) would provide a recommended figure. Subsequent adjustments to the retirement
age could be made like yearly cost-of-living increases are made today. Any
adjustments to the retirement age could be accurately projected at least five
years in advance, so that persons nearing retirement could still have the
choice of retiring early with reduced benefits (like 62 today) or delay retirement
with increased benefits (like 70 today).
In a survey of young workers, many respondents felt that Social Security would
not be available for them when they are eligible to retire. With this change
they can be assured of the same benefits as previous generations. No changes
would be required on how benefits are computed. No increases in payroll taxes
would be needed. With this small change politicians would never have to alter
Social Security in the future. It would remain solvent and secure forever.
It is a promise that would be kept from one generation of Americans to another.
Trust in the Social Security system would be restored and maintained. It's
a proposal that Congress and the Bush administration should seriously consider.
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