Posted on 06/25/2005 12:31:10 AM PDT by FairOpinion
The recent annual report issued by the Social Security Board of Trustees demonstrates with undeniable clarity that Social Security faces a looming financial crisis. Worse still, the report shows Social Security's lurch toward insolvency has accelerated.
In just a little more than a decade, Social Security will begin to run a deficit, the study shows. Deficits will continue and amplify every year well beyond the turn of the next century. Despite early protestations from many on Capitol Hill that "there is no crisis," few serious observers of the current state of Social Security hold out hope the system can survive as presently constructed.
Cash Flow Will Slow
The primary problem lies in Social Security's pay-as-you go structure. Social Security is not a savings plan. The money Americans pay into the system is not used to finance their own retirements; rather, it funds benefits for current retirees.
For much of the program's history, that structure worked fine. But just a few years from now, the number of workers paying into Social Security will dwindle, while the number of retirees receiving benefits will balloon.
For example, in 1950, the ratio of workers to retirees was 16 to 1. Today that ratio is only 3.3 to 1. When today's younger workers each retirement age, that ratio will be cut to 2 to 1.
President Rejects Tax Hike
It's not difficult to see the problem. And the willingness of many leaders in Washington to address the problem marks a rare moment of fiscal prudence and responsibility in our nation's capital.
Solutions, however, have thus far proved elusive. In his State of the Union Address to Congress earlier this year, President George W. Bush laid out some principles to guide Congress through the reform debate. He has ruled out tax increases, for two reasons.
First, increasing the payroll tax rate could have serious effects on the supply of labor and thus strangle the U.S. economy. The Social Security payroll tax is already the largest tax 80 percent of all Americans pay. This 80 percent represents primarily lower- and lower-middle-income households.
Second, Congress already has raised the payroll tax 20 times throughout history, and solvency still eludes us. The original Social Security tax was only 2 percent. Today workers and their employers pay a combined 12.4 percent. The millions of self-employed persons pay the entire amount.
Raising taxes again without real assurance that the proceeds would actually belong to those paying the taxes would allow Congress to spend more on other programs or lower other taxes without dealing with Social Security's fundamental long-term financing shortfalls.
Private Accounts Suggested
Bush also has insisted that any and all changes to Social Security not affect Americans who are 55 years old or older. If you were born before January1, 1950, your Social Security would not change one bit.
Bush's final principle is that younger workers should be given the right to choose whether to invest a portion of their payroll taxes in personal retirement accounts. Essentially, this proposal would allow folks to divert some of their Social Security contributions into safe stock and bond funds, much like those enjoyed by federal employees through the Thrift Savings Plan.
Personal Retirement Accounts are not a new idea. Nobel Prize-winning economist Milton Friedman considered something similar to personal retirement accounts as far back as the 1950s. The father of Social Security, President Franklin Roosevelt, envisioned a self-sustaining retirement program that relied on personal investment.
But Bush is the first president in recent times to push for such a reform.
One of the frequent criticisms of personal retirement accounts is that they don't alleviate Social Security's solvency crisis. That is a false charge. Indeed, personal retirement accounts are an integral component to the solvency puzzle.
Benefit Cuts Only Alternative
Only through personal accounts can we assure that contributors to the Social Security system have the legal, moral, and political right to their pension benefits. Roosevelt had these rights in mind when the program was conceived. Otherwise, the ultimate pension received will be at the whim of Congress--because no individual participant in the current Social Security system has any legal rights to future benefits.
Interestingly, attaining "solvency" can be used to justify either a tax increase or a benefit cut. Assuming Bush and the Republican-controlled Congress are not going to raise taxes leaves only one option, and it's not a popular one: Reduce benefits for future retirees.
Personal retirement accounts and the promise of higher investment returns through the use of capital markets allow Congress and the president to change the formula through which traditional benefits are calculated, without cutting the overall benefits to future retirees.
True, the mix of benefits would change. Some benefits would come from the traditional formula and some would come from personal accounts. But personal accounts have the potential to actually increase benefits.
No New Costs Added
There are costs associated with reforming Social Security. If taxes are not raised, then debt will be issued to finance the contributions. But these costs do not constitute new debt. The so-called "costs" of reform are already there. They're part of the current system and will continue to grow unless reforms take them fully into account.
The full, official measure of the government's commitment to pay future retirement benefits in excess of future payroll taxes amounts to $12 trillion (in present value terms) under the current system. Just like debt, this cost grows with interest as time passes. Hence, transforming the system by introducing personal accounts won't create "new" costs. It will only make existing costs more visible.
This transition does not necessarily relieve future workers' tax burden, given that they will be paying off the debt, just as they would with the continuation of pay-as-you-go financing. For the next generation to have lower overall taxes, the current generation of workers would need to contribute to the transition through additional savings.
Social Security needs fixing. Far from adding to the problem, personal accounts would be an integral component to this invaluable plan's long-term solvency.
-----------------
Thomas R. Saving (perc@tamumu.edu) was appointed by President Bill Clinton as a Public Trustee of the Social Security and Medicare Trust Funds in 2000 and was a member of President George W. Bush's Commission to Strengthen Social Security. Saving is director of the Private Enterprise Research Center and distinguished professor of economics at Texas A&M University.
The politicians have been 'stealing' from SS for so long
they cant live without it...
I can't, in my wildest dreams, come to a complacent mindset that in a "free" system which is toted time and time and time again by politicians, during peak election cycles, as the basis of our way of life, that the more government control in our lives is a political directive to personal freedoms consistently.>>>>>>>
You should be in the government, you have demonstrated the ability to write sentences containing no discernible meaning, this skill is highly valued at all levels of government.
I've resigned myself to the fact that it will forever be a permanent tax. We may never see any benefits, (I'm certainly not banking on it) but we will never see the burden of payment go away. Personalyy, I want to opt out. They can keep what they've already stolen, just include me out. But it will never happen.
I agree with you. The government has siezed money from my earnings without my permission for the last 42 years. I can't even get any back for at least another four . I want my $$ back so its not given to some SOB who made the wrong decisions in life or sits on his/hers a$$ all day for a welfare check .I could have amassed a small fortune if I was able to invest that $$ my own way in the stock market .
We're in the same choir brother!
Is this not a possibility, or am I way off base?
Barron's (from the Wall Street Journal folks) made precisely this prediction 10 years ago. Only it won't be a collapse; rather, it will be "slow death". Year in and year out, returns in the stock market will be low, interest rates will increase, and inflation will increase. We've enjoyed low inflation, high growth, and good stock market returns - partly because money was being saved to support the upcoming cohort of retirees. Now we'll see the other side of the coin.
It is, of course, way too late to dodge this particular bullet. But it will make people even more hesitant to consider private accounts.
I could name some names, but will bide my time.
Regards.
I believe the best idea is to make the Senate and House members retire under the SS system and toss the opulent Congressional retirement. They'd fix SS then.
Americans in general save less than 1% of their income. In addition, much of the money in the stock market is from foreign sources.
Money will continue to flow into the equity markets from foreign and domestic source as long as the returns justify the risk. Basically, as long as US corporations remain competitive and offer good returns on investment, the equity markets will not contract.
"Year in and year out, returns in the stock market will be low, interest rates will increase, and inflation will increase."
Nope--just because returns in the stock are/become low doesn't cause higher interest rates nor inflation. If anything, interest rates will go down because the supply of money available for borrowing will increase when returns in the equity market are low.
"The primary problem lies in Social Security's pay-as-you go structure. Social Security is not a savings plan. The money Americans pay into the system is not used to finance their own retirements; rather, it funds benefits for current retirees." - Article.
Actually, it does a lot more than that. It also transfers a big pot of money, the SS surplus, to the general budget.
"The reason, to a tee, why it will never, ever be passed through the house and senate." - EGPWS
The use of FICA witholding to prop-up the federal budget is the real reason congress will do nothing. If they enact private accounts, this surplus will not be there for other spending. Congress will have to borrow more, raise taxes, or reduce spending.
Some folks believe this problem will begin when SS starts to run a deficit. Actually, it starts far before that. It is happening now as the SS surplus erodes and less moeny is available to support government spending programs.
The two events are disjoint, as you suggest.
Note that liquidation of bonds and other debt instruments causes yields to go up. Since retirements will cause a change the flow of funds - more liquidations, fewer purchases - interest rates in the bond market will be forced up.
With inflation, the premise is that you have a body of people consuming goods, but not producing anything - i.e., they're retired. So if one has less production, but continued consumption, one might expect inflation. Then again, we have seen marked changes in globalization over the past decade, which may modify the validity of that premise.
Congress should raze the social security building under eminent domain and build the Charles K. Ponzi monument.
OK, a different perspective on how you fix SS.
Starting Monday, everyone under the age of 50 will be placed into the federal retirement and medical program, just like congress and federal employees have. Anyone over 51 and under 62 can choose if they want to stay in SS or move. If they choose to move they will have money placed in a private account, equal to 1/4 of their contribution to SS since they started paying in.
Anyone over 62 will stay in SS.
Everyone under the age of 50 goes into the federal program with 1/8 of their contribution to SS moved over. You raise the retirement age from 62 to 67 since we do in fact work longer. However, if you want to retire at 62 you can with what you presently have, you keep the medical however.
You go from there.
Both premises, of the bond market yields increasing and equity markets contracting are flawed. Increased foreign investment (EVIL GLOBALIZATION)in the bond and equity markets will "fill in the void" so to speak as long as the return on investment when adjusted for risk is good.
Increased inflation??? That's arguable. It may be an inflationary pressure, but the FED will keep a lid on inflation for the foreseeable future.
Your solution is, perhaps, the most intelligent one I've seen. My compliments!
$ucking $ocialists.
And a chorus is heard from afar--OFF WITH HIS HEAD!!
Yes, Congress should always have to live under the same laws they impose on the rest of us.
I favor the idea of private accounts as the lesser of two evils. (The federal government should not be involved in retirement at all, but private accounts would be better than the current mess.) Nevertheless, I see a great danger in the various privatization schemes being floated right now.
Simply allowing people to put a little money into private accounts will not avert the Social Security crisis. That will happen. What it does, the Democrats will blame the system's financial woes on the relatively modest (dare I say timid?) privatization plan. They will say that the system would be solvent if the Republicans had not fiddled with it. And many people will believe them.
(By the way, we saw the same tactic used against President Bush's tax cuts. When the projected deficit suddenly reappeared, the Democrats blamed it on the tax cuts, even though the cuts had not taken place, the cuts were relatively modest, and the deficit projections were accounting gimmicks to begin with.)
If the Democrats were to convince enough people that private accounts caused Social Security's problems, that would be the end of efforts to privatize the system. The Democrats could ride that to electoral success and further extend the welfare state for generations.
I think you are on to something here.
They tell me that if one rolled a grenade down the hall in the SS Admin. Bldg. in Baltimore, it would take out over half the workers!
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.