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08/09/2001
Social Security, Part I
It''s summer recess time and "Hott Spotts" is taking a vacation of
its own, as we liberally use the link to discuss a domestic hot
spot, Social Security. Two weeks ago, President Bush''s
"Commission to Strengthen Social Security" issued its
preliminary report. I thought we would cover the findings, as
well as the opposing side over the next 2 or 3 weeks. So for
starters, following are some key excerpts from the Bush
commission work, as chaired by former Senator Daniel Patrick
Moynihan and AOL Time Warner executive, Richard Parsons. I
will save any personal opinion for next week.
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"Social Security is one of the most important and most popular
domestic programs of the United States government. For
millions of retirees, it serves either as the sole or the primary
source of income, the mainstay of their dignity and
independence. Millions of others look to it to sustain or
supplement the retirement they hope to begin within the next
several years. Since its inception in the midst of the Great
Depression, it has made a vital difference in the lives of
generations of hardworking Americans and their families."
--
"The relentless truth of ascending life expectancies and declining
birth rates will put an intolerable squeeze on the system that now
exists. Consider the facts. In 1940, when benefits were first
paid, there were 42 workers per retiree. In 1960, there were five
workers for every retiree. Now there are slightly more than
three. Before long there will be just two."
--
"For our forebears, Social Security was a transforming novelty.
For us, it''s a system utterly devoid of options for building a net
worth that reflects the dynamism of the American economy or
which facilitates investments to the benefit of our children or
heirs."
"At present...workers and retirees have no legal ownership over
their Social Security benefits. Instead, what they have is a
political promise that can be changed at any time, by any
amount, for any reason. In any retirement system a lack of legal
ownership is a source of insecurity."
"If we are to maintain a sound system of support for tomorrow''s
retirees, this present generation of Americans must be
encouraged to save and invest more than it currently does."
"(Right now) the system is broken." [This word was later
changed to "unsustainable."]
--
How would households be affected if (future) shortfalls were met
by raising taxes? [If tomorrow''s shortfalls were faced today, the
following additional taxes would be required from a two-earner
couple with $50,000 in income.]
Shortfall in 2020: $860 in today''s earnings
Shortfall in 2030: $2,100
How would beneficiaries be affected if shortfalls were met by
cutting benefits? [If tomorrow''s shortfalls were faced today,
benefits would be reduced by the following amounts for an
average retiree and spouse.]
Shortfall in 2020: $2,227 in today''s annual benefits
Shortfall in 2030: $4,605
--
Our opportunity to become a nation of owners and savers:
"The median U.S. household owned only $17,400 worth of
financial assets in 1998, including retirement accounts. For
African American and Hispanic households, the numbers were
only $3,060 and $1,200 respectively.
[Editor: This is absolutely staggering.]
"Tax payments to Social Security represent the largest
contribution to retirement preparation for most Americans. If
savings and investment opportunities are not created within
Social Security, these Americans will lose their best opportunity
to acquire financial assets."
"If we are to support tomorrow''s retirees without overburdening
tomorrow''s workers, this generation of Americans must save and
invest more.
"The existing Social Security program does not save or invest for
the future. It was not designed to facilitate saving, and the
political process cannot be relied upon to save on behalf of
American families."
--
"Our Social Security system is managed as an income transfer
program. This means that every penny of benefits paid each year
comes from taxes collected or money borrowed from the public
in that year. Under such a system, higher taxes today do not
reduce tax burdens in the future."
"Today''s beneficiaries are not living off financial assets
accumulated in the past. Today''s workers are not accumulating
financial assets for the future. Workers ''invest'' their payroll
taxes not in financial assets but in the willingness of future
politicians to tax future workers to pay future benefits."
--
Some Basic Social Security Math
For all its complexity, Social Security''s underlying problems are
governed by some basic math.
Average benefits as percent of average taxable wage
[divided by]
Worker - to - beneficiary ratio =''s
Program cost as percent of average wage
*Example: Today''s average Social Security benefit is equal to
around 36% of the average worker''s wage. Since there are
currently 3.4 workers per retiree, the cost to each worker to
support today''s retirees is around 10.5% of his earnings.
[36/3.4 = 10.5]
If the worker-to-retiree ratio falls, then each worker bears the
burden of more retirees.
Example: If instead of 3.4 workers per retiree there are just 2,
then the cost to each worker rises from 10.5% to around 18 % of
earnings. [36/2 = 18]
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Social Security Cash Deficits Are Projected to Begin in 2016
"Social Security''s primary source of revenue is a 12.4% percent
payroll tax applied to the covered earnings of wage earners.
Social Security also receives money from the taxation of Social
Security benefits.
"In 2016, under current projections, Social Security will collect
less in tax revenues than it has committed to pay out in benefits.
"When that happens, the Social Security Trust Fund will still
show a positive balance. But the Trust Fund holds not
accumulated reserves of wealth but only promises that future
taxpayers will be asked to redeem. Whether the balance in the
Trust Fund is $5 trillion or zero, to keep the system in balance
the nation faces identical choices: raise taxes, reduce benefits,
decrease other government spending, or increase borrowing from
the public.
"When Social Security deficits begin in 2016, cash shortfalls will
be relatively small and could possibly be financed through
surpluses in the rest of the government''s budget. But these
deficits will eventually grow very large: $194 billion in 2025,
$271 billion in 2030, and $318 billion in 2035 (in 2001 dollars).
The cost of paying benefits will rise from about 10% of taxable
earnings today to almost 18% in 2035."
--
Why the Soc. Sec. Trust Fund Doesn''t Alleviate the Problem
"Bonds were credited to the Trust Fund over time, resulting in a
Fund balance now exceeding $1 trillion. The problem is that
when Social Security begins running cash deficits in 2016 and
must begin redeeming the Fund''s bonds, the nation will face the
same difficult choices as if there had been no Trust Fund at all."
[From the Clinton administration''s fiscal year 2000 budget]
"These (Trust Fund) balances are available to finance future
benefit payments and other Trust Fund expenditures - but only in
a bookkeeping sense...They do not consist of real economic
assets that can be drawn down in the future to fund benefits.
Instead, they are claims on the Treasury that, when redeemed,
will have to be financed by raising taxes, borrowing from the
public, or reducing benefits or other expenditures. The existence
of large Trust Fund balances, therefore, does not, by itself, have
any impact on the Government''s ability to pay benefits."
Next week...the other side of the debate.
Brian Trumbore
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