Social Security Reform

"Social Security is in need of an overhaul. The system is not sustainable as currently structured."

This conclusion from the bipartisan President's Commission to Strengthen Social Security summarizes the glaring need for Social security reform. Even the American Association of Retired Persons' (AARP) Public Policy Institute has written, "Under the intermediate cost assumptions of the Social Security trustees, the Old Age and Disability Trust Funds ... will be depleted in 2038 and tax revenue will cover only 73 percent of benefits."[1] 

In a May 2, 2001, speech to the Commission to Strengthen Social Security, President Bush stated, "The threat to Social Security has been apparent for decades. For years, political leaders have agreed that something must be done. But nothing has been done. We can postpone no longer. Social Security is a challenge now; if we fail to act, it will become a crisis."

A Looming Crisis?

President Bush has made clear his conviction that the nation's Social Security system is on the brink of a crisis. His concern over Social Security and the need for reform were the key components of his 2005 State of the Union address. 

In his response to the president's State of the Union address, Senate Minority Leader Harry Reid said the Social Security system may need a few minor adjustments, but is generally in good shape. According to Senator Reid, changes along the lines the president is proposing would be disastrous. 

While the president and a few reform advocates have been soliciting support, Reid and many Democrats have been equally zealous in drumming up opposition for reform. Meanwhile, as most Americans seem to be taking a wait-and-see attitude, many other Republican leaders appear to be consulting the political barometers before taking a firm stand on the issue.

Is the U.S. Social Security system in serious trouble? Reid and others cite a recent Congressional Budget Office (CBO) report in claiming the system will be self-funding at least through 2052.[1] The problem, they say, is far off; it is not a crisis. 

Actually, the CBO report--an evaluation of one of the plans the President's Commission to Strengthen Social Security (CSSS) had examined in 2001--found a 10 percent chance that Social Security's trust-fund will be exhausted by 2034 and an equal chance that it will last until after 2085. The 2052 date is only a probable projection that could be influenced by many factors, including changes in lifespans and, especially, changes the nation's overall economy.

In other words, according to the CBO evaluation, the best-case scenario has Social Security going bankrupt about the time the Baby Boomers' grandkids are ready to collect on it. The worst-case scenario sees the system choking by about the time the first wave of Boomers' kids reach retirement age. Most likely, however, the trust-fund depletion will occur after most Boomers have died. 

In any case, only Boomers and pre-Boomers duck the debt deluge. 

Social Security's status is not a contrived crisis. And if Americans choose to maintain the current benefits' level, someone will have to pay the cost, which is forecast to increase by 69 percent between 2001 and 2050.[2]

Trusting the "Trust Fund"

Even reform resisters admit that the nation's demographics--a rapidly rising retired-to-working-age population--do not bode well for the future. So their current claims that the system is in good shape for at least another generation are based on the notion that the system has a huge "trust-fund" account to draw from. 

But the Social Security trust fund is only a façade. Yes, through the years, there have been boom times, such as now, when the system takes in more than it spends, generating a surplus. But, because the system has always been "pay-as-you-go," the government has (for better or worse) felt free to borrow from this surplus to fund other projects. 

Consequently, the Social Security trust fund is not filled with cash, gold or other securities; it's filled with IOUs. To repay the IOUs, the government will have to borrow from somewhere else and/or raise taxes--significantly. 

Here's how the CBO stated the trust fund issue in a 2003 report:

At that point [2017, since revised to 2018] even though the Social Security trust funds will have credited balances for 24 more years, the program will be relying on payments from the Treasury--funds that will come from higher taxes, lower spending elsewhere, or more borrowing.[3] 

When Will the Crisis Really Begin?

According to most demographers, the universally accepted date at which Social Security payments will begin to exceed its income is 2018. From that point on, the red-ink trickle will flow into a red sea. 

Is a Social Security crisis looming? Against a human lifespan of 75 years, 13 years passes quickly, and it's not much time to correct such a huge problem.

Whereas Reid and most other Democratic Party leaders now say President Bush has contrived the Social Security crisis for his own political gains, many of them had different views until recently:

  • When the baby-boom generation begins to retire over the next ten years, financial pressure on the Social Security and Medicare trust funds will rise rapidly as payroll tax income falls short of what is needed to pay benefits. Both programs are expected to have expenditures in excess of receipts in 2016. - Sen. Robert Byrd, 2001
  • Our top four priorities should be paying off the national debt, passing a fair and responsible tax cut, saving Social Security, and creating a real Medicare prescription drug benefit. - Sen. Patrick Leahy, 2001
  • We need to be fiscally responsible and protect social security, provide a prescription drug benefit, fund education, ensure a strong and stable military, continue to pay down the debt, and to ensure the funding is available for our nation's veterans. - Sen. Harry Reid, 2001

PRESIDENT'S COMMISSION REPORT

In May of 2001, the President's Commission to Strengthen Social Security (hereafter referred to as "The Commission") was officially chartered. The 16-member bipartisan commission led by the late Senator Daniel Patrick Moynihan (D-NY) worked within the following "Guiding Principles":

  1. Modernization must not change Social
  2. Security benefits for retirees or near-retirees. 
  3. The entire Social Security system must be dedicated only to Social Security.
  4. Social Security payroll taxes must not be increased.
  5. The government must not invest Social Security funds in the stock market.
  6. Modernization must preserve Social Security's disability and survivor insurance programs.
  7. Modernization must include individually controlled, voluntary, personal retirement accounts, which will augment Social Security.

The Commission examined three reform models and issued its report on December 19, 2001 (revised March 19, 2002).

PRESIDENT'S COMMISSION'S CONCLUSIONS

The 256-page Commission report, "Strengthening Social Security and Creating Personal Wealth for All Americans," made the following points:

  • "As the Commission's interim report has shown, Social Security is in need of an overhaul. The system is not sustainable as currently structured" (italics added).[4]
  • "Each of the [three] Reform Models presented shows that, across the full spectrum of choices for balancing the traditional Social Security system, a personal account element would permit higher benefits to be paid than would be possible within equal revenue devoted to [the] current system."[5]

Furthermore, The Commission concluded, investment in private securities should be handled through personal accounts ("Personal Retirement Accounts," or "PRAs"), rather than the government investing, for the following reasons:

  • Assets are less likely to be diverted for non-Social Security purposes.
  • Government investment could be subject to investment pressures based on non-financial criteria.
  • Government investment might place the government in a position to interfere with corporate decisions.

The Commission did, however, recommend some limits on investment decentralization:

To prevent compliance costs from increasing, employers must be allowed to continue to submit contributions through the existing payroll tax system, which requires some centralization.[6]

Public Views on Reform

A February 2005 Gallup poll found the following responses to this question:

As you know, one idea to address concerns with the Social Security system would allow people who retire in future decades to invest some of their Social taxes into the stock market and bonds, but would reduce the guaranteed benefits they get when they retire. Do you think this is a good idea or a bad idea?

Based on that question, only about 40 percent of all the respondents and just 54 percent of self-identified conservatives saw Social Security reform as a good idea.[7] 

However, other surveys, with a better explanation of the need and clearer definitions of reform proposals, have found higher levels of support. Such varied responses, then, beg the questions, "What, specifically, is the problem, and what are some of the proposals to solve it?

The Problem

Quite simply, the Social Security problem is too many "baby boomers" and/or too few in the younger generations. There's no denying the demographics: For years organizations as diverse as the U.S. Federal Reserve, the United Nations and the Congressional Budget Office have been writing about the problems inherent in dramatic population shifts. 

When the U. S. Social Security program began, 40 workers supported each Social Security recipient. By 1950 the ratio had dropped to 16 to one. The ratio is now down to about three workers per recipient, and by 2030 the ratio is expected to fall to two workers per beneficiary.[8] 

Possible Solutions

Among the many solutions proposed, virtually all fall under one of the following four categories (or incorporate some combination of these four):

  • Substantial tax increases or massive cuts in other federal programs
  • Increase the age at which retirees can draw from Social Security
  • Substantial Social Security benefit reductions
  • Personal Retirement Accounts (PRAs) - also called Individual Accounts (IAs) - to compensate for the benefit reductions.

Contrary to what many suppose, PRAs have not been proposed as the solution to the looming Social Security budget shortfall. Rather, their purpose is to compensate for the huge benefit reductions that, short of raising taxes, will be necessary to keep the system solvent.

PRAs would merely allow their holders to invest a limited portion of their Social Security deduction into a managed fund, where they are likely to realize significant gains, rather than the losses they are virtually assured if they stay in the present system, plagued as it is by the depopulation problem. 

As recently as in his early-February-2005 State of the Union address, President Bush was still excluding payroll tax increases as a potential solution, but by mid-February he was backing away from his hard-line stance on tax increases. Specifically, the president has said he is willing to listen to proposals that would raise or eliminate the $90,000 cap on Social Security taxes. 

While such a move does have popular support, a Social Security Administration study concluded that eliminating the payroll tax cap would not solve the problem long term; it would just delay it by about six years (to 2024).[9] And, as many have stated, eliminating or substantially raising the cap would be a huge burden on small business owners, which in turn could hurt the entire economy. 

Other proposals would reduce future Social Security expenditures by tying (economists call it indexing) benefit increases to inflation rather than to wages. For example, the bill Senator Lindsey Graham introduced in the 108th Congress would have begun indexing benefits to inflation starting in 2009. 

Meanwhile, in part because of fear over how the opposition will portray inflation indexing as benefit cuts, other Republicans, such as Senator John Sununu, introduced reform bills that would ignore the touchy subject of benefit indexing. Like all other Social Security reform porposals introduced during the last session, neither the Graham bill nor the Sununu bill was ever voted on.

Conclusion

If the Social Security crisis is an imminent threat--and if inaction will indeed leave our children a legacy of fierce financial burden rather than prosperity--then why are Senator Reid and the Democrats now arguing against reform? The late Senator Moynihan's told former Senator Bob Kerrey (D-Nebraska), "they [most Democrats] worry that wealth will turn Democrats into Republicans." 

We assume Senator Moynihan made that statement at least partly in jest. Nonetheless, given the flip flop many Democratic Party leaders have made in assessing the status of Social Security, Moynihan's statement to Kerrey may have been more than mere banter.

The Social Security crisis is real.  And, as it will begin to hit in just 13 years, it is imminent. It's a crisis caused by "baby boomers" and our parents. Our generations should at least begin to solve the problem, rather than pretending it doesn't exist and leaving it for our children.

As long as the economy is in good shape overall, then the declining population should keep unemployment at low levels, meaning part of the solution may include later retirement and later Social Security eligibility. In other words, beginning soon, Americans should be willing to work longer and forestall receiving Social Security benefits. 

In addition, we need to seriously consider indexing benefits to inflation, rather than to wages. According to the American Academy of Actuaries, reducing Social Security's cost of living adjustments (COLA) by just .5 percent would reduce the projected deficit by 40 percent.[9]

Focus on the Family supports the president's call for Social Security reform. But reform must not come in a manner that puts the entire economy at risk. Rather, reform must include belt-tightening measures, such as indexing benefits to inflation rather than wages. Furthermore, reform should allow wage earners the option of investing a significant portion of their payroll taxes in personal accounts that will allow them to build a financially secure future. And it must begin very soon. 

[1] "Long-term Analysis of Plan 2 of the President's Commission to Strengthen Social Security," Congressional Budget Office, July 21, 2004 (updated September 30, 2004).

[2] "2001 OASDI Trustees Report," (Washington, DC: Government Printing Office), p. 44.

[3] "Social Security Reform: The Use of Private Securities and the Need for Economic Growth," Long-Range Fiscal Policy Brief, No. 7, Congressional Budget Office, January 3, 2003.

[4] "Strengthening Social Security and Creating Personal Wealth for All Americans," Report of the President's Commission, December 2001, p. 9.

[5] "Strengthening Social Security," p. 79.

[6] "Strengthening Social Security," p. 45.

[7] "Politics Driving Support for Social Security Reform," Gallup Poll, released February 22, 2005.

[8] William G. Shipman, "Private Social Security Accounts are Best Long-Term Investments Despite Market Jitters," Cato Institute, 14 August 2002.

[9] Chris Chaplain, Actuary, and Alice H. Wade, Deputy Chief Actuary, Social Security Administration, "Estimated Long-Range OASDI Financial Effects of Eliminating the OASDI Contribution and Benefit Base."

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