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What are the latest developments regarding Social Security?
The Bush Administration attempted to use its political capital from the November 2004 election victory to launch a campaign to significantly change Social Security. Even though Republicans control both houses, the subject is politically sensitive and the Administration faced an uphill battle to achieve significant reform. The powerful AARP organization vehemently protested the Administration's efforts. Little progress was made on the proposal and in the aftermath of the Administration's embarrassment in its response to Hurricane Katrina, the matter has been essentially abandoned.
The major current questions concern the long term solvency of the Social Security fund and the desirability of "privatizing" Social Security.
With respect to solvency, there remains the concern with projections that the current structure cannot remain solvent into the middle of the 21st Century. Recently the Chairman of the Federal Reserve Bank, Alan Greenspan, remarked that adjustments would have to be made to the system because the future economy will be unable to support it. In addition to these concerns, there is the reality that the U.S. government is presently borrowing from the fund in order to meet general fund obligations as the government is in a substantial deficit mode. There are economists who dispute the gloomy forecasts, pointing out that they do not sufficiently take into consideration greater immigration and sustained economic growth. The Presidential Commission on Social Security recommended adjusting the formula for cost of living increases to more accurately reflect inflation and to adjust the retirement age based on increases in life expectancy.
The privatization idea advocated by President Bush in the 2000 campaign resulted in a Presidential Commission which issued a report in December 2001. The commission recommended that younger workers be permitted invest some of their payroll taxes in the stock market. At first, the accounts would be managed by a government-appointed board that would tightly control the kinds of investments allowed. Eventually, the program might allow private-sector managers to handle investments and permit them to offer a broader array of mutual funds. Workers could change their investments once a year. The proposals would require new government spending and in some cases, workers retiring in 30 to 50 years would face cuts in annual benefits from 1 percent to nearly 33 percent. Public opinion generally supports the idea  (Click to see chart), although the level of support diminishes when some of the risks are considered.
Opponents of privatization observe that fluctuations in the financial markets could jeopardize retirement security for those whose investments were unsuccessful. They also note that administering small accounts would consume a large fraction of revenues as would the marketing costs incurred by private funds as they compete for worker's accounts. Net returns on private accounts would be reduced by the costs of management fees, account administration, and marketing.
The 2004 Democratic platform objects to the privatization of Social Security and the fact that the government is borrowing from the fund. The Republican platform urges the adoption of the privatization recommendations of the Presidential Commison.
What is Social Security?
Social Security is a government program which provides benefits for American workers. As it has evolved for the past sixty years, it is actually three programs in one: a retirement plan, a life insurance policy that covers the family of every worker (equivalent to a $300,000 life insurance policy) and a disability insurance program (equivalent to a $200,000 disability insurance policy.)
Social Security benefits are protected from inflation and guaranteed for life. Social Security is distinct from welfare because it is available only to workers and their families and because it provides benefits which significantly exceed benefits available under welfare programs. But it is also distinct from privately purchased pensions or disability and life insurance in that the benefits are not entirely distributed in a manner which reflect contributions. Lower-income workers obtain a greater percentage of benefits when compared to their contributions than do middle and upper income wage earners.
More than 139 million workers pay 6.2 percent of their earnings, up a maximum of $80,400 in 2001, to fund Social Security. The self-employed contribute as both employer and employee - 12.4 percent. Many Americans depend on Social Security for a great deal of their retirement income. (Click to see chart)
Over its entire 60-year history, Social Security has never had enough money to pay 75 years of benefits, simply because it is a pay-as-you-go program. In any year, most of the money coming in through payroll taxes is also paid out in benefits. Revenue not being used to pay Social Security benefits are invested in U.S. Treasury bonds and is thus used to finance other parts of the federal budget. In 1998, interest earnings on the $750 billion Social Security surplus were $49.3 billion.
How do other countries handle Social Security?
All seven major industrialized nations have social security systems that provide old-age, survivorship, and disability benefits. Each of these systems is also funded on a pay-as-you-go basis; the United States and Japan accumulate some reserves for future use. Payments to current beneficiaries are financed through payroll taxes on current workers and employers. A few countries, such as Japan and Germany, use general tax revenues in addition to payroll tax collections to finance social security benefits. The level of public pension spending varies across the seven major industrialized countries. The United States spends about 6.9 percent of GDP on Social Security. Other countries, including Germany, France, and Italy, spend more than 10 percent of their GDP on public pensions. These countries also have roughly proportionate tax rates to finance their public pension programs. All these countries are also facing the prospect of having fewer workers to support their systems in future decades.
Is Social Security really in trouble?
As the "baby boomers" begin to retire, there will be gradually fewer workers and more retirees. This is basically a result of the greater longevity of seniors and of a declining birth rate. Under current projections, Social Security will continue through 2014 to take in more revenue than is needed to pay benefits. Beginning in 2015, incoming revenue combined with interest earnings can finance promised benefits through 2023. In 2024 the principal will have to be tapped. By 2037 the principal will be exhausted, but incoming revenue would still cover nearly three-fourths of current law benefits. Three major factors could improve these adverse projections: 1) the growth of the economy; 2) improvements in worker productivity and 3) modifications in U.S. immigration policies. On the other hand, should medical advances in the near future significantly extend life expectancy, the forecast could even be worse.
What are the proposed Social Security reforms?
There have been many proposed reforms of the Social Security system that would rectify the projected shortfall.
Many of these proposals involve suggested adjustments to the current structure of the program. The major proposals include:
- Increasing the retirement age and indexing it to current longevity standards. Already the retirement age is scheduled to increase to age 66 for those born after 1943 and to 67 for those born after 1959.
- Increasing Social Security taxes by raising the $80,400 income limit (currently $80,000) or eliminating the limit entirely. The separate Medicare tax limit has been already raised to $125,000.
- Mandating Social Security coverage and participation to 3.7 million state and local government employees who are currently excluded from the program.
Other proposals involve a fundemental change to the structure of Social Security program itself. These proposals include converting the Social Security program to a "means tested" program thereby excluding higher income wage earners. The Medicare reforms passed by Congress in November 2003 begin to implement this concept. The drug benefit is much greater for lower income Americans and there is a significant reduction in "Part B" Medicare coverage for higher income retirees.
During the Presidential Campaign, President George W. Bush proposed a plan for partially "privatizing" Social Security. Although this proposal was not specific, the general idea was to allow younger workers the option of investing an unspecified amount of payroll taxes in the stock market. Such a plan would not preclude decreasing guaranteed benefits for future retirees. This privatization plan has not yet been part of the President's legislative agenda.
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