5 January
by John Vomastic


Straight Talk on Social Security

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 so.

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 health.

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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