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The Future of Social Security

Submitted by Michael Mahler on April 12, 2005 - 5:35am.

The Future of Social Security

What's the problem? …the cure?

Table of Contents:

Executive Summary

Social Security (S.S.) is the crown jewel of progressive government -- a singular achievement that reshaped what used to be impoverished old age. It has lifted generations of seniors out of poverty. The way the system works now, the federal government collects S.S. taxes from your wages (up to $90,000 annual income) while you are working, and, in return, provides monthly payments to you once you are eligible for benefits (minimum age 62 for retirees) until you die.
S.S. pays monthly benefits to some 47 million Americans who are retired, disabled, or the survivor of a deceased parent or spouse. S.S. benefits are the sole income for one out of five retirees, and they provide at least half of the annual income for two-thirds of those 65 and older.
S.S. is aptly called a safety net. Part of the viability of American democracy is that we care for one another to whatever extent we are able. Since its inception, the S.S. system has done just that by guaranteeing a base income to eligible beneficiaries.
Because of increasing life expectancy and other demographic changes, it has been known for many years that the present system needs modification to remain secure for successive generations. In this Position Paper, the long-term cash flow problem facing S.S. will be explained, and possible solutions will be outlined.
When the merits, feasibility, and fairness of the known solutions are compared, three surface as clearly good choices: (1) remove the cap on wages subject to S.S. tax; (2) rescind tax breaks given to only the wealthiest 2% of our citizens and apply the resultant Federal revenues to Social Security and Health Care; and/or (3) reduce S.S. benefits for people with high retirement incomes. Senator Santorum's first choice -- privatization (i.e., personal investment accounts) -- is high risk, does nothing to fix the looming shortfall in the S.S. system, and is a bad choice.

What is broken?

There is no current financial crisis in the program, and fears regarding its solvency are unwarranted. Currently, S.S. taxes (12.4%, split equally by workers and employers) bring in more dollars than are paid out in benefits.
The surplus, now roughly $180 billion a year, is invested in treasury securities and deposited into a trust fund, which now holds over $1.5 trillion of these interest-bearing bonds. Note that since President Bush took office in 2001, S.S. surpluses have been masking the massive federal budget deficits created by irresponsible tax cuts for mainly the wealthy plus the financial costs of preemptive war on Iraq.
However, as was well known even before Bush took office, a future cash flow problem is projected due to demographic changes. Annual cash surpluses may soon begin to decline and then turn into rapidly growing cash deficits toward the end of the next decade as the baby-boom generation retires. Such growing annual cash deficits will lead to exhaustion in trust fund reserves in 2042 or 2052, depending on whose economic and demographic assumptions are used. As the reserves in S.S. are drawn down, the pressure on the Federal budget will intensify. The currently projected long run growth rate of S.S. is probably not sustainable under current financing arrangements. [Note 1]
For more info, go to http://www.ssa.gov/OACT/TRSUM/trsummary.html

[Footnote 1: deterioration of the financial outlook for the Medicare Hospital Insurance (HI) Trust Fund that pays hospital benefits is even more severe and imminent -- annual cash flow deficits beginning this year are expected to grow rapidly after 2010 as baby boomers begin to retire and will lead to exhaustion in HI trust fund reserves in 2019. In addition, the Medicare Supplementary Medical Insurance (SMI) Trust Fund that pays for physician services and the prescription drug benefit that Congress enacted in 2004 will require substantial increases over time in both general revenue transfers and premium charges.
See “The Burden of Social Security Taxes and the Burden of Excessive Health Care Costs,” by Dean Baker and David Rosnick, March 24, 2005, http://www.cepr.net/publications/ss_hc_2005_03_24.pdf]

Possible solutions

Benefit Reductions

1. Raise the age when a person can start collecting full S.S. benefits
2. Lower cost-of-living (COLA) adjustments to S.S. benefits
3. Reduce S.S. benefits across the board
4. Reduce S.S. benefits for people with high retirement incomes
5. Increase number of years of income to calculate S.S. benefits

Revenue Increases

6. Increase payroll tax rate that workers and employers pay
7. Increase amount of earnings subject to payroll taxes
8. Tax S.S. benefits like private pensions
9. Increase minimum wage by $1 per hour, and index to cost-of-living

Structural Changes to the Program

10. Change S.S. from a system where the trust fund is invested in government bonds, to a system where some of the money is invested in private markets, using independent portfolio managers and indexed funds.
11. Change S.S. from a system where the government collects all the taxes that workers and their employers contribute, to a system where individuals invest some of their payroll contributions themselves
12.Establish individual accounts in addition to S.S.

Best ideas

  • Raise the maximum wages (now $90,000) subject to S.S. payroll taxes.
    Today, top earners have a larger share of the income pie, and the portion subject to S.S. tax has fallen on average to 84%. As annual earnings rise above $90,000, the amount of S.S. tax that a worker pays becomes a progressively smaller percentage of total income. E.g., the tax drops from 6.2% to less than 3% on a $190,000 income.
  • Rollback some of the tax cuts for the rich that President Bush championed during his first term in office. This would yield enough to cover any future S.S. shortfall, and the resultant Federal revenues could also help cover the looming Medicare shortfall (major impact on wealthiest 2% of the population).
  • Reduce S.S. benefits for people who have high retirement incomes and are financially secure.
  • The projected S.S. deficit could be covered by modest benefit cuts. E.g.
    decelerate future COLA increases in S.S. benefits by tracking prices instead of wages (major adverse impact on wage earners at the lower end of the income spectrum).

Worst idea

President Bush, Senator Santorum, and other Republican leaders have made privatization their top priority for 2005. Their plan is to let workers create personal investment accounts using up to two-thirds of their S.S. payroll withholding taxes (FICA), and to phase out Social Security as we know it. Though few specifics have been released, the hope is that private investment in the stock market will generate equal or greater returns than traditional S.S.
benefits that are concurrently relinquished. The risk is that they will not.

Here are ten reasons why Santorum's plan makes your retirement problems WORSE:

  1. Privatization would slash guaranteed retirement benefits Privatization means diverting taxes used to fund current S.S. benefits into individual investment accounts, thereby outsourcing the financial risk of growing old from the S.S. system onto each individual. People with investment literacy or enough wealth to afford professional advice would be advantaged.
    Others might do fine, or not. Returns would depend on timing of investing and retiring, on the whims of the stock market, and on other things that often will be out of your control. Personal accounts will not guarantee positive investment returns. If you opt for privatization, what is certain is that your benefits paid out of S.S. funds will be much lower.
  2. Privatization would explode the federal debt with trillions in new borrowing If workers choose to divert some of their payroll taxes currently funding S.S. benefits into personal investment accounts, the government will have to replace the taxes it would otherwise have collected in order to pay benefits to current and near retirees -- thus requiring the government to borrow (mostly from foreign banks in China and Japan) an estimated $2 trillion over the next 10 years, and much more thereafter. The burden of paying back this huge new debt would be shifted to future generations.
  3. Privatization does nothing to strengthen S.S.'s solvency, and it will erode funding for needed social services Even its advocates admit that privatization will not fix the looming shortfall in the S.S. trust fund. As pointed out by ultra-conservative columnist George Will, privatization is ideologically driven and lacks compelling fiscal reasons. A smaller S.S. trust fund to borrow from will create pressure to cut government spending for needed domestic programs. (If Congress in its wisdom wants to cut spending, it could do so without trashing S.S. along the way.)
  4. Privatization would undermine S.S.'s family protections, causing more disabled workers and children/spouses of deceased workers to live in poverty Today, S.S. is a lifeline for 7.6 million people with disabilities and for more than seven million survivors of workers who have died. Privatization jeopardizes benefits for these categories of beneficiaries.
  5. Privatization would weaken community fiber Part of the viability of American democracy is that we care for each other to whatever extent we are able. Privatization reflects an ethic of selfishness that represents neither compassion nor the true spirit of our democracy. It would unravel the social contract in the interest of enabling workers to accumulate bequeathable wealth by gambling on the performance of the stock market.
  6. Personal investment accounts could be depleted before retirement A grave danger of privatization is that investors could withdraw their funds before retirement, thereby reducing their retirement income. It would be politically difficult to refuse access to an account that was sold to you on the premise that you, not the government, would own it.
  7. Personal investment accounts would fade away during retirement, leaving nothing to bequeath Under the Santorum plan, when you retire the money in your investment account must be used to buy an annuity that will return fixed monthly payments to you for the rest of your life. Upon death, your annuity expires, and the only money your heirs can receive is the amount, if any, left over from purchasing the annuity.
  8. Privatization is a scheme to prime the stock market pump The performance of investments in the stock market is a function of the quantity of money invested: the more a company’s stock is in demand, the more its market value appreciates. Privatization would assure a stock market boom, short term. This in turn would rescue the Pension Benefit Guarantee Corp. which has been suffering through a period of record-breaking claims due to a series of bankruptcies of private pension funds that were underfunded and invested in stocks that went south. But when the stock market bubble bursts, those who opted for personal retirement accounts will not be happy as they watch their stock holdings shed value.
  9. Privatization would be a windfall for Wall Street Wall Street is sure to benefit from privatization. Giant financial services firms have been salivating for decades over the prospect of taking over S.S.
    Stockbrokers will collect billions of dollars in fees by managing the personal investment accounts -- money that comes directly from your benefits whether or not the investments are profitable.
  10. Privatization would be a seedbed for corruption Privatization would open the S.S. system up to corruption, waste, and Enron-ization, because corporations have been known to "cook the books," and politicians would choose which of their Wall Street campaign contributors are in line to make billions in fees for managing your personal investment accounts.

Citizen actions

What you can do about it

Links to resources

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