Social Security Reform
A little over sixty years ago the nation struggled through what was, up to then, the most dramatic crisis since the Civil War. The economy was uprooted after the crash of the stock market and the country’s financial stability destroyed. One of the many steps taken to alleviate the burden on the American people was that of the passing of Social Security Act of 1935 and its amendments by Congress and the President, Franklin D. Roosevelt (http://www.socialsecurityreform.org/history/index.cfm). Under the provisions of the Act, the government would take on the responsibility of taxing the income of all working Americans and returning the money through numerous public benefits and programs which provide monthly benefits to nearly 45 million retired and disabled workers, their dependents, and survivors. Now the nation faces an economic and political problem with the program instituted to earnestly help the people.
In the first half of this century the government will face the task of paying benefits to a large generation with funds it will not have. Social Security is the largest Federal Program, accounting for 23 percent of all Federal spending. Almost all political sides agree that Social Security must be reformed in some way before the baby-boomer generation begins to retire and collect. Social Security benefits refer to all those measures established by the government through legislation that help an individual or household to maintain an income of a certain level, insure income if one’s employment is lost, provide other assistance for disability, old age, survivors, and other forms of compensation.
Social Security may be defined through several characteristics: (1) participation is mandatory. Everyone, including children age 5 or older, is required to have a Social Security (2) Eligibility for benefits and levels of benefits depends on past contributions made by earners. (3) Benefit payments begin at a stipulated time such as at retirement from work, upon temporary unemployment, or with disability (4) Social-insurance benefits are means-tested – one’s wealth or lack does not determine whether benefits are granted (Compton’s). (5) Currently SS funds are collected and distributed on a pay – as – you -go (PAYG) system in which Social Security taxes from individuals are immediately distributed by the means of the SS Administration as it sees best fit. This means that taxes collected are not reserved for the individual who has paid them: in Rose 2 the current state he or she must rely on those persons paying Social Security taxes during the time of their retirement (Becker). For a number of these characteristics and future issues, the Social Security System must be reformed or completely abolished to meet the needs of tomorrow.
The leading concerns of Social Security that merits the immediate initiation of reform are the demographic and economic circumstances in the coming century. Even though “forecasting the economy and budget over such a long period is uncertain” there remain many “certainties” regarding problems facing Social Security in the first half of the 21st century (OMB, Budget Perspectives 23). The Federal Government’s responsibilities extend well beyond “the five- or six-year window” that has restricted the focus of recent budget analysis and debate. Of these, “certainties” are the mounting challenges posed from the baby-boomer generation. This generation, born in the years after World War II, is aging and will “begin to retire around the year 2005. By 2008, the first baby-boomers will become eligible for social security”(OMB 23). With the increased expenditures for baby-boomer group and pre-existing entitlements, a serious strain will be placed on the budget for the majority of the next 100 years. As currently, the PAYG system has allowed for four workers to pay for every retiree. “But, when the baby boom generation retires, eventually only two workers will be paying for every retiree”(OMB, 1998 Budget 195). Long range projections from research done by the Congressional Budget Office last year observes that “Those fiscal demands could produce unattainably high levels of federal debt and taxes unless additional actions are taken to control federal spending” (OMB, Budget Perspectives 25).
The baby-boomer issue is not the only problem facing the future of the budget regarding Social Security. The Social Security Trustees Report projects that population growth is expected to slow over the next several decades. This slowdown is expected to lower the rate of population growth making older groups and retirees a very large percentage of the population. The labor force participation (by percentage) will therefore decline as the average age increases (OMB, 1998 Federal Budget 196). This decrease in the number of Social Security paying workers will undoubtedly make for abatement in the total amount of Social Security taxes collected each year to be distributed in services. As this occurs the Federal Government would have to borrow money to pay its obligations to those with Social Security assisted living, increasing the federal debt. Rose 3 Another criticism of social security is the attacks on the fact that it pays Old Age, Survivors, and Disability Insurance (OASDI)+ to those persons regardless of their wealth or lack of it thereof. This practice, even though it was established to be non-discriminatory, has been rebuked by many persons of poorer backgrounds because it takes away from the extra benefits that they could be receiving and pay it to some persons who may not need it as extremely (Samuelson). Retired workers account for 61% of all social security recipients and of those 60% rely on it for half or more of their total income. Because this total amount usually is not too great, they feel they should be getting more by cutting the benefits paid to the other 40% that rely on it for half or less of their total income (OMB, 1998 Budget 196).
The criticisms of Social Security, or “Insecurity” as some have labeled it, have been discussed and now the issue about how to revise and fix these problems must be firmly addressed by the Government in its all-knowing, all-powerful stature. The Federal Budget for the US Government for the Fiscal Year of 1998 and it’s supplements address the aforementioned problems but state no incipient actions to solve any grievances or future obstacles, as predicted by the Office of Management and Budget, the Congressional Budget Office and many other private organizations, including Dow Jones (OMB, Budget – Perspectives 23-31). The 1998 Budget section for Social Security reports that all of the segments of the OASDI Trust Funds would be insolvent by 2029, “but it does not constitute an imminent crisis” because the Social Security Trustees measure the Administration’s well-being for a period of 75 years. Obviously the baby-boomer and generation-X generations are in danger of not receiving Social Security benefits being paid in taxes right now.
Unofficial proposals by legislators and leading financial experts have been proposing solutions for many years now, but they either do not have the power to introduce them or are politically apprehensive. These proposals include, but are not limited to, privatization of social security in stocks, Personal Security Accounts (PSAs), raising taxes – lowering benefits, Cost of Living Adjustments (COLAs), and abolishment of many Social Security benefits.
The most controversial and popular proposition offered has been that of privatization of some parts of the social security system. By this approach the government would invest 40% of the Social Security surplus into Wall Street on numerous private and public stocks. This would give Rose 4 the Administration “a $1.3 trillion stake in Corporate America by 2020″ (McNamee). This system would allow workers to also invest at least 11% of payroll taxes in their own accounts. Under the boldest plan, proposed by the Clinton Administration’s Advisory Council on Social Security, exactly 50% of the retirement fund would be “replaced with mandatory personal security accounts”, which would be invested in stocks or bonds (McNamee). The other 50% would finance basic government benefits for all retirees. The privatization of accounts could theoretically reduce the length of time before the trusts go insolvent by substituting savings accounts for some part of Social Security’s PAYG system. This would ensure that the government would have a surplus of funds for entitlement expenditures. By 2020, PSAs could hold assets worth around $6.0 trillion dollars if put on the market within a few years. “Such a huge balance [just for benefits] would give a kick to the nation’s capital stock and [spur] growth” (McNamee). But the Advisory Council and others have come up with this plan not to balance the economy, just fix Social Security. The Council and Social Security Trustees have concluded that if nothing else is done to reserve funds for the upcoming insurgence of retirees, Social Security will exhaust the trusts by 2029, and PAYG “taxes will cover only 75% of promised benefits”. To ensure solvency for another 75 years Congress would have to choose now to privatize, raise “the 12.4% payroll tax, cut benefits”, or all three (McNamee). The limitations of privatization also come into play when considering the best reform platform.
Questions arise as to how the government could do this without taking over the market and the consequences if there were a crash. Putting SS funds into the stock market for higher returns is agreed to be a very likely idea, but would individuals be willing to obey a compulsory law requiring letting the government manage funds on the stick market? There is also no true way to insulate investment planning from political pressures. If the market fell, the funds invested would go down also, and if they succeeded too well the stocks would raise interest rates on debt, hurting the economy (Business Week, How to Resecure SOCIAL SECURITY.). Compulsory saving in stocks would also require tax increases or cuts in government spending (Samuelson). Privatization, though, may be worth a try. Currently, the US Government can afford to experiment; as there exists no immediate SS crisis, and if funds are not raised for saving the benefits being paid after the trusts go bankrupt will not be at paid at 100%. A small amount of investment therefore definitely seems worth a try.
The next practical solution is seen as the very risky, at least to politicians hoping for reelection. That is the raising of the already high payroll tax at 12.4% and the lowering of benefits Rose 5 to save for the coming tide of retirees and entitlements. This controversial move would ensure that Social Security would be paid in full for at least 75 years, but is challenged greatly by those already on OASDI, who have strong political footholds. Interest-group politics can weigh in greatly. The American Association of Retired Persons, for one, pledges to keep Social Security as a government guaranteed plan. Labor, too, is opposed. Free-market agencies and business would favor any change, however (McNamee). Neither the Executive nor the Legislative Branches of the government are anywhere near willing to make a move like raising taxes and/or lowering benefits because of this.
A very practical, and yet controversial, method being proposed for saving is that of lowering the Cost Of Living, or making a Cost Of Living Adjustment (COLA). Last year it was discovered that the consumer price index (CPI) has been over-stating the annual cost of living by 1.1%. Social Security payments are directly tied to the CPI and determine the annual payment amounts. In other words, beneficiaries have been doing a little better than the true rate of inflation. Simply by reducing the CPI by 1.1 percent a year the government could save approximately $1 trillion in 12 years (Thomas 2). The benefit payments would still rise with the true cost of living, but the Social Security trust funds would be able to remain solvent well past the expectation dates proposed by the trustees. This simple solution also has been thwarted by political apprehension. US economist Daniel Patrick Moynihan, states, “politicians are scared of each other and the AARP” (Thomas 2). It may be likely, though, that President Clinton will appoint a non-partisan committee to review the Social Security Issues and lower the CPI, and thus benefits, through protected legislative order, sparing any legislators.
The final proposal by radicals is to abolish many programs, including Medicare, which may not be necessary to the substantial living of some individuals. They also feel that a means test be established to decide who and who does not need assistance. These ideas have been mostly shot-down due to a favorable opinion of the Social Security system in general, and the fact that it requires more government regulation to institute the means tests.
All of the plans are impractical, if implemented solely. Alone, each creates large practical risks for the system. Perhaps the best plan is to drop economic ideals and to find a compromise in the different economic fervors that put the idea people at each other’s throats. A solution may be found to solve the different aspects of Social Security by combining different plans. The president needs to appoint an independent (completely independent) and non-partisan committee to propose a Rose 6 total solution that would ensure complete payment of all Social Security entitlements for at least the next 75 years. Perhaps with this, a real fix can come about so the up-coming generation (Gen-X) will receive benefits that are currently being paid from earnings.
“Social Security: A Program’s Rise.” Journal of Economic Perspectives 1995.