Social Security Reform

Preserving Social Security for future generations is one of the nation’s top priorities. Demographic changes in our country are looming and require us to act now to ensure the solvency of the Social Security system. The current situation offers opponents of Social Security the best chance they have had in six decades of trying to phase-out the program

Preserving Social Security for future generations is one of the nation’s top priorities. Demographic changes in our country are looming and require us to act now to ensure the solvency of the Social Security system. The current situation offers opponents of Social Security the best chance they have had in six decades of trying to phase-out the program

Historically, Social Security has made a secure retirement possible for tens of millions of Americans and should remain so for future generations. I believe we should preserve Social Security’s guaranteed, lifetime, inflation-protected benefit; and protect disabled workers and their families. Maintain the system’s progressive benefit structure. Strengthen the Social Security system, while ensuring that women and other economically-disadvantaged groups are protected.

As the baby boomer population ages and enters into retirement, the need for Social Security reform becomes even more apparent. Federal Reserve Chairman Alan Greenspan urged Congress in February of 2004 to deal with the country’s escalating budget deficit by cutting benefits for future Social Security retirees.

It is my belief that Social Security is a sacred bond between the US Government and the citizens of our country. President Bush’s proposals during his first term would have required borrowing trillions of dollars to pay for his plans; I would not support any plans that put this country any deeper in debt or any changes to Social Security — including privatization schemes — that require us to borrow any additional funds.

We have a responsibility to fulfill the promise of Social Security, not undermine it. We also have a duty to ensure that we do not create an inter-generational conflict. It is important that everyone, especially Baby Boomers, plan for their retirement by supplementing Social Security with personal savings, pensions, and other financial investments.

However, reducing social security benefits and replacing (some of) the lost benefits with private investment accounts is gambling even if the accounts earn a relatively optimistic rate of return, and even if the accounts are limited to conservative investment options. The reason why private investment accounts are risky is because people don’t know how long they will live. Someone living to (say) 95 is going to do much worse with private investments, simply because the privately invested money is going to run out well before they die.

Sen. Dianne Feinstein of California said about private accounts: “I strongly oppose private accounts, which could cost $1 trillion or more and still fail to improve the financial condition of Social Security. Unless I see a proposal that protects the fiscal health of Social Security and does not dramatically increase the national debt, I will continue my opposition.”

Soft pro-privatization propaganda has been getting more pointed over the last three years, even as the actuaries at the Social Security Administration have been reporting that the predicted Social Security funding shortfalls are receding further and further into the future.

Half of current retirees are going to live longer than those who previous retiree populations. This half will either have to withdraw money more slowly or will exhaust their private investment accounts long before they die. So with private accounts, those who die early end up with some of their money going to their heirs, and those who die late end up potentially in poverty. Only the hypothetical “average” person the one who dies at an average age, having exactly exhausted his/her private investments at exactly the right time is going to do as well as any “predicted” outcome for private investment accounts.

The Bush administration utters propaganda about Social Security’s insolvency and the need for “long range changes” in the program, and the sooner the better. Similar verbiage is now contained in the mailings that the SSA sends out to all Americans who pay into the system, describing their lifetime earnings and projected benefits.

The bottom line is this entire debate is about ideology — between people who believe in the benefits Social Security has brought America in the last three-quarters of a century and those who think it was a bad idea from the start. There is an honest debate to have on this point, a values debate. Only, the White House understands that the belief that Social Security was always a bad program isn’t widely shared by Americans. So they have to wrap their effort in a package of lies, harnessing Americans’ desire to save Social Security in their own effort to destroy it.

The current method of wage indexation was created in 1977, under the Carter Administration. Wage indexation makes it impossible to “grow our way” out of the Social Security problem. If the economy grows faster and wages rise, this produces more tax revenue. But the faster wage growth also means that we owe more in Social Security benefits. This has produced a never-ending cycle of higher tax burdens, even during periods of robust economic growth. It is the classic case of the dog chasing his tail around the tree; he can run faster and faster and never make any progress.

Congress usually addressed the built-in funding problem of social security by raising payroll taxes (from 2 percent in 1937 to 12.4 percent today). Congress has raised Social Security taxes more than 30 times. Social security system is projected to reach a day of reckoning: Retiree benefits will exceed payroll tax receipts, and to pay its bills the system will have to begin redeeming billions of dollars in special Treasury bonds that have piled up in its trust fund.

Under current law benefits are calculated by a “wage index” — but because wages grow faster than inflation, so do Social Security benefits. If we don’t address this aspect of the current system, we’ll face serious economic risks. If we borrow $1-2 trillion to cover transition costs for personal savings accounts and make no changes to wage indexing, we will have borrowed trillions and will still confront more than $10 trillion in unfunded liabilities. This could easily cause an economic chain-reaction: the markets go south, interest rates go up, and the economy stalls out. To ignore the structural fiscal issues — to wholly ignore the matter of the current system’s benefit formula — would be irresponsible.

An average retiree in 2050 would be scheduled to receive close to 40 percent more (in real terms) in benefits than an average retiree today — and yet there are no mechanisms in place to produce the revenue to pay out those benefits. No one on this planet can tell you why a 25-year-old person today is entitled to a 40 percent increase in Social Security benefits (in real terms) compared to what a person retiring today receives.

Baby-boomers were asked to overpay into the system to create a reserve to cushion the stresses that would be created when their oversized generation retired. The fiscal stresses created by the retirement of the baby-boom generation will build slowly over-time as the generational cohort moves through retirement. Needless to say, none of this means that some funding tinkering won’t be necessary in the system down the road.

One option to meet those benefit levels would be to raise the age at which people receive benefits. If we followed the formula used when Social Security was first created and make the age at which you receive Social Security benefits above the average age of mortality — we’d be looking at raising the benefit age to around 80.

Another way to meet those benefit levels is through the traditional way of raising taxes. According to the latest report of the Social Security Trustees, the current system’s benefit formula would require some $10 trillion in tax increases over the long term. We’d therefore need to raise the payroll tax almost 20 percent simply to provide wage-indexed benefit levels to those born this year. Social Security’s financing was restructured in the early 1980s. Payroll taxes were intentionally raised substantially over and above current needs so as to build a ‘trust fund’ that could be drawn down when the surge of baby-boomer retirements began early in the 21st century. In essence, opponents of President Bush’s plan to rescue and modernize Social Security increasingly are claiming “there is no crisis.” However:

  • The “Social Security Trust Fund” is essentially an IOU from the federal government. From the taxpayers’ perspective, the Trust Fund is nonexistent. When Social Security starts needing Trust Fund assets to pay benefits, taxpayers will be expected to pony up cash – $5 trillion worth – to restore funds spent from what many mistakenly believe is a genuine trust fund. Social Security will need to tap the “Trust Fund” in approximately 2018. But, because the federal government has gotten used to spending Social Security taxes as if they were general revenues, the Social Security cash crunch – the “crisis,” if you will – actually begins in 2009, the year the Social Security revenue surplus begins to shrink.
  • America has options to solve the crisis: Reduce benefits to seniors, or increase savings to avert the cash crunch. President Bush is choosing the latter option. Doesn’t it make sense for critics to work with the White House to craft the best plan possible, rather than deny action is needed? Underscoring that difficulty, Sen. Arlen Specter, a prominent moderate Republican, has expressed his opposition to cuts in promised Social Security benefits for future retirees with the phrase “I strongly oppose this approach.” Sen. Specter said this during an interview at the WTAE-TV studio in Pittsburgh. But after a closer examination, “I think it is unwise,” he said. “I believe the seniors ought to be reassured that their Social Security benefits are solid.”
  • There are $1.8 trillion in U.S. Treasury securities in the U.S. Social Security Trust Fund. It is imperative that the Democrats ask Bush whether he intends to honor that obligations and force him to make a public proclamation of his steadfast commitment to do so. The Democrats must take the lead in committing themselves to honor those obligations.

On the issue of privatization, I had some time ago considered the idea of placing a relatively small portion of my benefits in an investment account, providing that the “security” aspect of Social Security was retained and the investment was under professional management. However, with the severe fluctuations of the stock market, I have since rejected that idea. This situation unites Democratic policy groups from the most left leaning labor-liberals to the newest New Dems in believing that the Bush Social Security phase-out plan is bad policy for America. Democrats have plenty of things more important to do right now than to fight amongst themselves. Democratic centrists are signaling that they might support private accounts only with conditions Republicans likely would find difficult to accept.

Most policy makers agree that the rate of growth of this program, as well as the oversight of its expenditures, must be addressed to ensure its integrity and preservation. Opponents say the emerging Bush proposal doesn’t allow younger workers to invest up to 4 percent of their payroll taxes in private accounts, instead, it allows them to divert 4 percentage points of their contribution to their own private account. Even this, while accurate, leaves a misleading impression.

Social Security portion of the payroll tax amounts to 12.4% of your salary up to about $87,000 annually. The employee kicks in 6.2% and the employer contributes 6.2% as well. What the president is proposing is that individuals can divert roughly 4 of those 6.2 percentage points into their private investment account. What percentage would that be of the annual contribution to the Social Security for the given worker? About 30%.Saying that individual workers are merely taking 2% or now 4% out of their contribution makes it sound like a nominal amount. Just enough to give a trial run to private accounts. The more accurate description — 30% of their contribution to Social Security — makes it sound like a much bigger deal. It’s understandable that the White House would prefer the misleading description. If we choose to borrow money (from ourselves) to transition to privatization of Social Security, it will have a devastating effect on the national debt. Just to transition to this method would cost taxpayers at least a trillion dollars.

Currently:

  • The United States has a bit over $7 trillion in accumulated national debt .It was borrowed over what happens to be the span of my lifetime — the last thirty-five years — and especially over the last twenty-five years
  • After 1980 we started borrowing money big-time to finance our deficits — in large part because of tax cuts on high-income earners. However you want to slice it, we started spending substantially more than we were taking in tax revenue. So where did we borrow the money?
  • $4 trillion of that debt was borrowed on the open market — individual Americans have them in their investment portfolios, or pension funds hold them, or the Chinese, Japanese and the Saudis and others have them in bonds.
  • $3 trillion of those dollars we needed to fund the 1980s and 1990s deficits we managed to borrow closer to home. We borrowed it from the Social Security (and a few other government) trust fund(s).
  • Almost the entirety of President Bush’s Social Security phase-out plan comes down to a simple proposition: finding out how not to pay it back. Now, admittedly, this is an approach that the president is rather familiar with from his own business career at various failed energy companies. But it is, in so many words, a straight up con — one of vast scale, and one which virtually no one in the media ever frames in just these terms.
  • So why does the president believe he can get away without making good on the debt to the folks who pay Social Security taxes, who are overwhelmingly low and middle-income wage earners (since no one pays Social Security tax on investment income or wage and salary income over about $85,000 a year)? Isn’t it obvious? Because he thinks they’re an easy mark.
  • If anything, the fact that a sizeable portion of our huge national debt is owed (in the aggregate) to ourselves would seem to be a good thing since it gives us in extremes at least some flexibility on repayment. But to the president this is a reason to abolish Social Security so the money doesn’t have to be paid back at all. As I have said, the challenges we face over the next several decades aren’t really Social Security problems but national indebtedness problems, though the issues are clearly related.
  • One obvious and immediate way to relieve long-term pressures on Social Security financing is to reduce the national debt … by ending our habit of running huge annual deficits or even better, by paying down some of our accumulated debt (there are complicated macro-economic questions related to this second point; but in general it’s correct.)
  • President Bush presided over the biggest negative fiscal turnaround in American history, taking the country from a modest annual surpluses to the biggest deficits — at least in non-adjusted dollar terms — in American history.
  • The Federal government should be paying down debt (not running $412 billion deficits) so it will have the borrowing capacity to pay off the obligations to the Trust Fund.
  • Social Security must maintain a “guaranteed benefit” that prevents any retiree from falling below the poverty line. Any proposal “must be fiscally responsible.” Can any proposal that requires $2 trillion in additional borrowing on top of our existing problem with accumulating national indebtedness be considered “fiscally responsible”?
  • President Bush has done more than any other president and perhaps any other single American ever to endanger Social Security’s future. Across the board, it’s just one big scam.

Alan L. Joplin

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