The Elly Report: National Issues

Social Security, Why Reform?

Debate has been brewing in the past few months about Social Security -- where it stands now and where it is going as government program. The debate was sparked by President Bush when he made Social Security reform a cornerstone of his re-election campaign. Now, having been re-elected in part on his promise to reform Social Security, the battle has been joined. Today, Congress is discussing Social Security reform.

To begin, it's appropriate to understand the history of Social Security -- how it began, how it has changed, and what it is not. Social Security began in the US during the Great Depression at a time when unemployment was high (ranging from 10 - 25%) and a concern of most people was whether they would survive to see old age. So President Roosevelt signed the Social Security Act in 1935 as part of his New Deal legislation in order to give people the assurance that something, indeed anything, was being done to alleviate the economic troubles of the day. A program was established in which employees would pay taxes into the system starting in 1937; the first payments to eligible workers would start in 1942. An amendment to the SSA in 1939 accelerated the payment schedule to start in 1940. Among other things, this was as an ominous sign that Social Security could and would be used for political purposes.

Social Security Was Sold as Old Age Insurance
What's important about this system is the idea that Social Security was sold to the American people as an old age "insurance" program. If you paid into the system, you were guaranteed to receive a benefit like a life insurance policy. Over time, the system grew and expanded to include dependents of those receiving benefits, and disabled persons and their dependents.

The way the system was set up and the way it is run today is as a pay-as-you-go system. Today's workers pay into the system to fund the benefits for today's beneficiaries. What the program is not is a system of guaranteed benefits. In fact, the Supreme Court ruled in 1960 in the case Fleming v. Nestor that payment into the system does not guarantee receipt of benefits. They ruled that the money paid in is not your own; it belongs to the government, to do with as it wishes. As history has shown, the system can be changed whether to increase, reduce, or possibly eliminate benefits.

Social Security Facts
Here are some facts about the current Social Security system. Workers contribute a flat 6.2% of gross income to the system and employers match that sum with an equal amount for a total of 12.4% of gross income. For the taxpayer, these "contributions" are not eligible for refund when filing an income tax return. That money is off limits and lost for good.

Today the retirement age is 65 years old, the same as when the system was established in 1935. Many changes have taken place in those 70 years including increased life expectancy. In 1940, the average life expectancy from birth for all races of either gender was 62.9 years. In other words, most people at the time of inception of the program would not even live long enough to receive a benefit. In 2000, the average life expectancy for all races of either gender was 77.0 years. That means people today will live to collect benefits for at least 12 years past the age for which they are eligible to receive benefits.

Along the same line, in 1940 when benefits were first paid out, there were 50 workers paying into the system for each person receiving a benefit. By 1970, the number of workers paying into the system to provide benefits for each beneficiary was 4. Today, this number has shrunk to 3 and, 35 years from now when I'm retired, the number of workers contributing to my retirement will be 2. With the number of retirees increasing faster than the number of workers to support them, the current system will start running a deficit in only 11 years, starting in 2016. This means the reserves built into the system to this point will start eroding to provide the same level of benefits to the point the system will run out of money in 2042, right about the time my colleagues and I will be eligible for retirement. The simple progression of the increase in scope of the system has led us to a point where the current pay-as-you-go system is simply unsustainable.

Why Reform?
The question remains, why reform Social Security? Well, doing nothing means a train wreck of epic proportions down the road. Doing nothing means eventually, taxes will need to be increased to maintain the same level of benefits or benefits will need to be reduced to maintain pace with the taxes paid. As reducing benefits does not appear to be an option, regardless of your political point of view, that leaves two options: increase taxes or change the system.

When I'm retired under the present system, my two daughters will be supporting me. I wouldn't want to increase that burden on them and I don't think most people would. That's why reform is necessary now.

Under several plans to maintain current benefit levels without increasing taxes, private ownership of Social Security funded accounts are the most feasible. The size of the amount set aside varies from plan to plan, but the impact is the same. By using the power of the available markets rather than the current system of Treasury notes, the returns gained will offset the costs of the government paying a direct benefit. Average stock market returns over 40 year periods typically range around 10% compared to the 1-2% gain from Treasury notes, upon which the current system relies. This is how the benefit level will be maintained without raising taxes. In addition, under the current system, the money paid into it is lost once pay, but with a privately owned account, that money is transferable. The account holder will determine the outcome of the account, not a bureaucrat. Reform of the system will also open retirement savings to low income earners who don't have access to standard retirement instruments like 401(k) accounts or IRA's.

This reform will provide all earners with greater control over their economic futures while averting the disaster of having no Social Security system at all.

By all accounts, the current Social Security system is headed for trouble. The amount of trouble and the accompanying time table differs depending on who is asked and the specific questions asked, but everyone agrees the system as currently constituted is failing. The pay-as-you-go system has finally run its course and doing nothing makes a crash inevitable. Maintaining the same pay-as-you-go system leaves us with the decision of raising taxes or cutting benefits and only delaying the inevitable crash. Only a system that includes privately held accounts can maintain a sustainable Social Security system. Program specifics are negotiable and President Bush has stated that all options are "on the table." If maintaining some kind of Social Security system is the goal, better to make those changes now, while time and money permits than wait until the possibility of change and available options disappear.