Social Security Is Solid

Despite talk of a need for privatization, the U.S. government program still does the job and requires only modest tweaks: Pro or con?

Pro: A Healthy Mainstay

Social Security serves as an important source of income for the elderly in the U.S., and the reasons to support this universal, compulsory public policy are numerous. On average, it makes up 40% of older persons’ incomes. Income provided by Social Security has helped reduce the poverty rate among the old from 35% in 1959 to 10% today.

Social Security derives all its funding from the FICA tax. Its streamlined administrative costs add up to less than 1%. It redistributes resources from higher to lower lifetime earners. And it gives women and men equivalent benefits, though, on average, women live five years longer.

Why then are so many talking about privatizing it? Some think privatization will address Social Security’s financial problems.

The current program is fiscally sound until 2041, at which time it will cover 80% of promised benefits. But with privatization, the Social Security budget shortfall would arrive as early as 2017. Administrative costs would rise substantially as the number of accounts and the degree of government regulation increase. And because we would have to fund the old and the new programs simultaneously, overall costs would rise by nearly $2 trillion.

There are better ways to address Social Security’s fiscal shortfall. Despite the talk of crisis, Social Security is a strong program in need of only minor funding adjustments. We could increase the FICA tax from 6.2% to 7.2%. We could raise the tax cap on earnings from $90,000 to $140,000, per person per year. And we could pull the 30% of government workers who do not participate in Social Security into the program.

Others favor privatization because it maximizes individual choice and ownership. But privatization also makes old-age incomes less secure, eliminates redistribution from higher to lower earners, and ends the subsidization of women’s longer lives. We need a robust public program to ensure income security in old age.

Con: The Model Needs Repair

The sooner that we fix Social Security the better. We are fooling ourselves if we delay. Note please that I say "fix" and not "end." Despite others’ rhetoric, no responsible policy person wants to end Social Security.

The problem is simple: As baby boomers age, there will be more retirees collecting benefits and fewer workers paying taxes. We have promised younger workers higher benefits than we can afford to pay. Starting in 2017, less than 10 years from now, the program will begin to pay more in benefits than it receives each year from payroll taxes. Annual deficits will quickly reach several hundred billion dollars and never end.

Who says so? Social Security’s nonpartisan, professional actuaries, the nonpartisan Congressional Research Service, Bill Clinton’s White House budget agency, and many others. Since 1983, Americans have paid more in payroll taxes than Social Security needed each year for benefit payments. Unfortunately, Congress spent the extra money on everything from roads to aircraft carriers. All that is left are government bonds that, like all IOUs, have to be repaid. Taxes that now pay for other programs will be sent to Social Security as those bonds are redeemed. Other programs will either get cut or taxes will increase.

How do you fix it? There are three ways: Raise taxes, change benefits for future retirees, or increase individual private retirement savings. All three have very real and painful side effects. For instance, raising taxes will reduce both economic growth and employment. Since this is a spending problem, changing benefits and increasing saving would be better ways to go.

I want my daughters to have the same retirement security that Social Security helped their grandparents to achieve. Delay just makes fixing Social Security harder and more expensive. It is not a responsible legacy to leave our children and grandchildren.

Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.

Reader Comments

random

The old axiom about the three kinds of lies in the world stands true. There are lies, damn lies and statistics. Here we have a case of statistics.

"Starting in 2017, less than 10 years from now, the program will begin to pay more in benefits than it receives each year from payroll taxes."

True, but since the system has been running a surplus since the 1950s or so, it has a rather impressive cash cushion that is often ignored in such arguments. Not even the pro argument notes that the system will remain solvent (no, not fiscally sound but fiscally solvent) until a time period between 2042 and 2052, according to CBO estimates. By then, who knows what will happen and how many people will be paying into Social Security and how much they will be paying in?

The reason the cash cushion under Social Security is so often omitted is to create a sense of urgency to change or just outright dismantle the system. For President Bush's campaign to privatize the system, the 2017 stat was a perfect tool to somehow substantiate his claim that we were on the verge of the system's total collapse into insolvency. What if he were to use 2042 to 2052, the time when the cash cushion actually runs out?

By then, most baby boomers whose benefit pay outs would be the greatest burden on the system are no longer with us and would no longer be drawing any money from Social Security. Without driving home the 2017 stat, the "emergency" he was trying to solve would seem like a manageable challenge easily offset by just waiting for another economic boom and pocketing larger FICA taxes.

Of course the biggest reason the Social Security crisis has come up is because modern conservative luminaries detest it as an example of socialism just shy of collective farms and the October Revolution. Hence, they were willing to invest $200 billion a year for the next 10 years in transitional costs to permanently abolish what they saw as the greatest culprit of the welfare state. This might sound rather disparaging and accusatory, but this idea figures very prominently in the screeds of neo-conservative pundits, writers and political leaders.

"Annual deficits will quickly reach several hundred billion dollars and never end."

Unless there's another baby boom or after enough boomers pass on for the fiscal equilibrium to reestablish itself. Average life expectancy is 80 years or so, and very few Boomers will pass that due to the ravages of old age. The youngest are now 43 and by 2042, they'll be 78. Somewhere down the line, there will be the right amount of payees to recipients to cover all Social Security obligations followed by a new period of surpluses as the boomers continue to pass on.

lws

It's my money, and I would like control of it.

asarualim

There is another way to save Social Security. The rate of return for a pay-as-you-go pension system is a direct function of two factors: economic growth and population growth. If Social Security is going broke and we don't want to increase taxes or reduce benefits, we have only one option: Increase the number of people paying payroll taxes.

How do we do this? Easy, liberalize immigration. Let more young, skilled, semi-skilled, and unskilled workers into this country and fast-track them for citizenship so they start paying pay roll taxes.

Now I know immigration reform is a political land mine, but I think it's less of a land mine than reforming Social Security. Personally, I'm surprised that no politician has tried to sell immigration reform as a means to solve Social Security.

Tell me what you think.

fixer

Sadly, Random does not understand the Social Security trust fund. There is no cash cushion. The government does not have the ability to save or to invest money. It can only collect and then spend it. The idea of a cash cushion sounds like Scrooge McDuck's swimming pool of money, but it does not exist.

Social Security taxes go to the Treasury, which then spends part of them on Social Security benefits and the rest on other things. Social Security gets bonds for its trust fund. Those bonds do accumulate interest, but until the government redeems them with cash collected from another source, they cannot finance anything. Trust fund bonds are special issue, meaning that they cannot be sold into the secondary market, so they can only be redeemed at some point.

Those bonds will have to begin to be repaid in 2017, according to both Social Security and the Congressional Budget Office. They will run out in about 2041.

There is no cash cushion, and there never has been one.

Plebius

Wow--both the pro and the con are completely wrong. For clarification, there is no such thing as a surplus. Taking money from your wife's wallet and putting it in your own does not constitute a surplus for your household finances. Why do you think companies got out of pensions? Same concept as Social Security...it doesn't work. Private accounts in Brazil work, and they retire with twice the savings of U.S. citizens but make much much less. Why? Capitalism. Social Security is not a free market, capitalist concept.

random

"Social Security taxes go to the Treasury, which then spends part of them on Social Security benefits and the rest on other things. Social Security gets bonds for its trust fund. Those bonds do accumulate interest, but until the government redeems them with cash collected from another source, they cannot finance anything."

Actually, the bonds issued to Social Security are Treasury bonds that have never gone unpaid when they were owed. It can't just say "I'll have it to you next century." It has to pay up when the bonds mature. The Treasury can choose to allocate its payments by cutting out several dozen billion at a time from non-essential government programs and mandating to reduce pork barrel legislation as well as securing investments abroad, selling debt to other countries as is done now to finance federal budget deficits, or turning any future surplus into actual cash, giving an extra decade to get solvency.

A lot of huge numbers get thrown around in these debates, but we keep forgetting to divide it by the number of applicable years. The resulting annual numbers come to rounding errors in the federal budget, and provided lawmakers are forbidden from building $50 million bridges to nowhere and making $100 million earmarks for special interest groups, adjustments would hardly be terrifying.

In fact, giving Social Security its promised funds (aka its surplus) can be viewed as the perfect reason to trim down outrageous spending requests and senseless earmarks.

"Taking money from your wife’s wallet and putting it in your own does not constitute a surplus for your household finances."

No, it constitutes stealing. But if your wife invests any extra money into bonds, it most certainly does, since when the bonds mature you'll get a pay out. It's not like the Treasury can just decide not to pay its obligations.

"Private accounts in Brazil work, and they retire with twice the savings of U.S. citizens but make much much less. Why? Capitalism. Social Security is not a free market, capitalist concept."

Maybe it has something to do with the fact that Brazilians save far more of their incomes then Americans who spend virtually every dollar they make? If just the fact of a capitalistic economy makes for immediate monetary savings, the U.S. savings rate should be well above the 1% it currently is. Could it be that Americans should invest more in their 401k accounts, live within their means, and save at least 8% of their incomes? Just a thought outside of the normal dogma.

Pat O

I understand that the dollars aren't sitting someplace waiting for us to spend them. However, the bonds that were issued were intended to be redeemed at this time. So it is necessary to redeem them to continue the system that the government borrowed from.

The con position mentions that the money has been spent on things like roads and aircraft carriers. I agree. These assets are available for the future generation now, and never were free. An aircraft carrier is a fifth-year asset. If we ought not to wage a war or invest in a foreign government or operate a military base someplace in the world, then we should stop that spending now.

Asking those of us who have paid into the system for a lifetime to forgo the pay out that was planned for 45 to 50 years of contributions isn't the answer.

Fiscal imprudence has been going on for decades. Most conservative thinkers want to continue to spend on military and global policy processes. Those programs need to be funded by taxes raised for that purpose. My retirement funds were never taken from my generation with the intent of funding general accounts of the government. That is why the bond was issued. It is redeemable now.

pat o

If you are running a race car, you tune the vehicle for the race ahead of time--not while the race is underway. We've missed the opportunity to change the engine, to make the profound changes being discussed. Socialism or capitalism aren't the issue now. Getting through the race, the baby boom retirement time, is all that matters at the moment.

Change can be considered, but as a very slow process over decades. Not abruptly, and not while in the middle of the time of most stress on the system. Again like the race car.

Add a year to the retirement date, increase taxes slightly, and put real stress on the government to stop spending on optional projects. Especially those that do not benefit the U.S. taxpayers directly. Do we really need a space station and NASA? Another Mars shot? Do we really need bases in Europe? Do we need NATO? Not if you're asking me to live a miserable or marginalized existence in retirement we don't.

I can go along with modest changes as a pragmatic necessity, but concepts of free market capitalism vs. socialism aren't important to me right now, not at this moment in time. I want to retire soon, and in peace. Forget the rhetoric.

Dr Coles

The full retirement age is based on maintaining a 50% death rate, so the government does not have to pay for benefits but to half of the investors. The government gets 15% of all wages (up to $102,000) in America and is so incompetent as an investment manager, if we could we would have fired them. They do not invest our money and increase the funds. The problem with Social Security is totally caused by government. No matter what your political party affiliation and setting aside your thoughts on issues, we all need to remember what it is to be an American citizen. We need to make sure our elected representatives obey their oath of office and keep their oath of allegiance.

hewhoasks

(Scrooge McDuck didn't have a swimming pool of money, he had 3 cubic acres of money.)

And yet, Dr. Coles, I can be an investor and invest totally in U.S. Treasury bonds. Just like the Social Security Administration.

As an investor, I would know that higher yields carry with them higher risk. It is very simple to point to top-performing mutual funds or to the average performance of mutual funds and say "look how great that is," but those funds do have associated risk and there were people who invested in what looked at the time like good funds--but later found out they were below-average funds.

Nor, Dr. Coles, is it likely that everybody can get rich investing like everybody else is investing, which is what you'd have with the personal account scheme. There's a reason large, very successful mutual funds stop accepting new investors: The fund managers cannot manage a huge fund as easily as they can manage a smaller one. The personal accounts would be, in toto, the hugest fund ever.

But hey, let's go even simpler: Show me the prospectus. Not useless political claims and promises, an actual prospectus.

In all these years of hype about personal accounts, there has never been anything approaching a prospectus for them. Bush did reveal that retirees, in their lifetimes, would be forbidden any access to their principal--but most personal account advocates don't mention that (largely because most don't even know it. It's visible on the White House Web site).

Cliff

Simply put, Social Security is too political to touch, because everyone depends on it. The only way out is for the U.S. government to slowly reduce its value through inflation (which is a hidden tax, of sorts). This is being done by indexing Social Security to measures that hide true inflation. Politically acceptable and totally doable. In fact, it's being done right now. Deflation of the dollar is inflation for all imports (most notably oil).

Rusty Shackleford

Liberalizing immigration would actually deal a huge hit to Social Security. There are many illegals who work under an improperly obtained SSN, pay their Social Security taxes, and never file a claim. This is a windfall for the system since revenues are collected and never paid out. Liberalizing immigration would facilitate the process of paying out benefits due to these workers. This would nullify all current calculations for the date the trust fund runs out.

As for privatization--follow the money. Who stands to benefit? Taxpayers? Perhaps. But, if you think about it, a cash infusion of this magnitude dumped directly into the stock market would more likely benefit big business. Who decides which companies get my privatized tax dollars? Is it a spoils system, dictated by the reigning administration, subject to change with each transfer of power?

With privatization, we're making the assumption that the average taxpayer understands investing. Many of these taxpayers currently can't/don't save money, so how can we expect them to responsibly invest their privatized Social Security portfolio?

Most workers can invest some discretionary income for retirement. For those who can't, Social Security provides a guaranteed level of benefits. If the market tanks on a privatized Social Security, that guarantee is removed. Do not gamble with what you cannot afford to lose.

michael

Random, better check your own "damn lies." The money is gone, baby, gone, and any way you slice it, the taxpayers are going to have to come up with the repayment on the bonds. That means the trust fund has been spent. It is a meaningless fiction that the left is trying to argue saving Social Security somehow. What we are talking about in truth is that we are going to have to come up with about $400 billion to $500 billion a year from other taxes to maintain what we have going now. Paying $2 trillion one time compared to that forever is a good deal. The left has double-talked this into massive confusion, but it is very simple. We take and spend all the Social Security money every year. It takes about $200 billion to make Social Security payments, and we are spending another $200 billion on other stuff. Once that runs out we have to come up with the $400 billion a year that we don't have to come up with now. The trust fund is a fiction. Even in your later response, you talked about getting some of the money to fund the trust fund from cutting other programs. Yeah, that is just the problem.

I think we should get rid of Social Security and turn it into a welfare program. People who need it, get it, period. My wife and I make more than $200,000 a year. Why in the hell should we be getting the $12,000 a year or whatever small amount we will get from Social Security when we don't need it, and other people who make little get stuck with $900 a month in Social Security? They should get more; we should get nothing. This is all about greedy old people.

LowRankSalaryman

Many of us have adapted to the Darwin world and keep competing for more. What about the humanity book we have to keep? Old age is the last chance to balance the books. Have we collected enough entries in the book of compassion?

Surely there are enough of us blessed with well-behaved children, good health, interesting jobs, and a small prosperity to forgo Social Security entitlement and keep it solvent.

In the Darwin world, the U.S. Social Security system is a pyramid scheme cloaked in the fog of time. There is no fix for it. Out of the Darwin world, it is a grand distribution system of compassion. It works as long as we have compassion.

Ever since I passed my full Social Security age, I have endured the condescending question, "Why are you not collecting you due?" I hope I have the strength to continue my reply: "Nothing good will come out of it."

I am encouraged by the same thought posted by "Michael." We don't have to take the entitlement if we don't need it. And it will be there when we need it.

Dean Carlson

Social Security will have to be deleted as the U.S. government now uses these funds to help balance the budget. Look at the budget. The fund will dry up in the next 15 to 20 years. There are not sufficient illegals to pay into the fund. Sorry, I'm being a little sarcastic just to make a point.

criollo14

If the Social Security tax collection surplus had been held in a money market fund invested in treasuries and taken out of the general budget it would probably own the entire national debt and would be bigger than the GDP (even at 1 trillion/10 years). It is disingenuous to say it adds to our debt problems. The shortfall comes from raiding the FICA tax for general purposes and not leaving behind the I.O.Us.

Laury Adams, Independent Financial Resource Consultant

Time for “Out of the Box Thinking” on Social Security

• Seeking the best solutions to any problem requires asking the right questions. Social Security was started as an insurance program, not retirement.

• Is the original purpose of insurance still viable for Social Security or do we need to re-examine this? Once the purpose is clearly defined? How do we go about achieving it?

• If insurance is deemed a necessary social good, why are some groups of workers able to opt out of the system to set up alternative retirement programs that do not have the same insurance feature?

• What is the provision that allows groups to have alternative retirement plans? Under what circumstances? Who decides? How many employees in the country have alternative plans instead of contributing to Social Security?

• In doing research, I have contacted Social Security for this information. They have responded by saying they are looking for the answers and have referred me to the IRS who is responsible for collecting the taxes.

• If some groups of workers can opt out of Social Security to contribute to a retirement plan, is it discriminatory not to allow other groups to make this choice?

• As insurance, what determines the appropriate level of income that should be taxed? Should there be a contribution base, currently $106,800? If so, how should that be determined?

• Might it be time to consider separating the insurance and retirement components instead of combining the two? All workers in the country could contribute a small percentage of total income to the insurance component of Social Security and the retirement annuity would remain separate to provide for the retirement of contributors.

• Should Social Security be consistent with other Federal laws like ERISA that have provisions for recognizing marriage as an equal partnership? At the time of divorce, there is no provision for dividing the Social Security records accrued during marriage.

Jim Tomes

What if a private insurance company collected premiums for an annuity policy for 30 years, and then when it came time to pay sent a letter saying that they were only paying half the benefits because they used the premiums for employee bonuses and regular day to day business expenses?

They would be thrown in jail. The only problem with Social Security is that the program lent its surpluses to the federal government crooks.

Dorothy Grunewald

Did you know we pay 500,000 foreigners social security benefits? Did you know that social security has a foreign office that works to provide U.S. Social Security foreign payments to new countries each year? India and Mexico are already in talks for their nationals that have worked in the U.S. to receive U.S. Social Security benefits. Most people are not aware of this and should be a major point of political discussion. Social Security has already "negotiated" with 22 countries for their nationals to get U.S. social security benefits. More are planned on the way. Take action to stop/reverse this, ask your congressman/senate representative to stop the payment to foreign nationals of OUR social security. We are depleating the funds because of less and less taxes going into the system and we are further depleating them by paying foreigners our money? How can we allow this to happen?
It is known to very few people that Social Security has it's own international office and conducts it's own foreign international agreements so that foreigners that have worked in the U.S. can get U.S. social security benefits. Now there are some serious issues to consider, we are not only giving benefits to foreigners through the negotiated agreements conducted by SSA, we are giving them benefits even if they do not work the required 10 years (as all Americans must do in order to collect benefits). The agreements provide that the U.S. agency takes into account the years of work the foreigners have had in their country and combined them with the U.S. years of work to calculate a U.S. benefit. I wonder why this is not widely publicized and how can the agency negotiate these international agreements without public scrutiny? Our system is going bankrupt and they are working to give out more benefits to foreigners? Their work is ongoing and has not stopped despite the latest fiancial problems that have been plaguing our country. Please educate the American public EXPOSE this prevailing and catastrophic problem to our social security. Thank you for listening. Dorothy Grunewald
http://www.aarp.org/online-community/forums.action/work-retirement_social-security_social-security-money-going-overseas-foreigners-social-security-working-send

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