Brad Causey
Brad Causey,
Editor and Publisher
Doug Helton
Kelly J. Logan
R. Shannon Pollard
Kevin Sommers
David R. Wehry
Brian Bordwine
James E. Foy
The Freedom Letter
Social Insecurity
You may have paid some attention to the political debate about the future of Social Security. The President has a plan for reform. Some members of Congress in his own party have differences of opinion. Most members of the other party deny that a problem exists. What are the facts, both past, present and future?
Social Security is a new deal program created in the 1930's. Prior to this, the federal government had no role in pensions or retirement. As history teaches us, the 1930's was a period of severe economic contraction. "Going to the poor house" was a real possibility. We must remember that governments do not have any money of their own. Government can only spend the money it forcibly collects from its citizens, or borrow, and therefore burden future generations. The federal government during the depression was collecting less in taxes than it had in previous years. There was no money to start a new federal program. When the program was created, a new tax was created to fund it. The official name of the tax (and program) is the Federal Insurance Contribution Act or FICA. To those in the accounting world, it is simply the payroll tax. The payroll tax is currently 7.65% on both the employer and the employee. A total of 15.3%. Employees and their employers each contribute 6.2% to social security and 1.45% to Medicare. The 6.2% portion is currently capped at $90,000. The medicare portion has no income limit. If you are self-employed, you must pay both taxes. In the fiscal year of 2002 the payroll taxes generated revenues of over $749 billion dollars. In the same year the system paid out almost that amount in "benefits." Add the $231 billion spent for medicare and the number is almost a trillion dollars. Last year 48 million people received a social security check. 33 million of these are retired, and have supposedly paid into the system. The balance of payees are either survivors, (some teenagers) or on disability. Initially social security was created as a safety net or as Franklin Roosevelt said "a supplement to one's retirement savings." It was never intended to be enough to live on, and was strictly for those over 65. Soon, an "early retirement" benefit was added which allowed some to start receiving a check at the age of 62. In the 1960's the survivor benefits were added. In the 70's disability was added. Also in the same decade the benefit calculation changed to a formula based on current wages with indexing for inflation.
When the program was started in 1935 there were about 15 people paying taxes for each person receiving a check. If we assume that the average check has averaged $1000.00 a month, this works out to less than $70.00 a month per person in taxes. By 1955 the ratio had dropped to 9 to 1. In that year it was a little over $100.00 a month in taxes so that others could receive a check. By 1995 the ratio had decreased to 3 to 1 or about $334.00 each. 15 years from now, the ratio will be only 2 to 1. Look at your last paystub. Find the FICA deduction (or social security only if they break it down). The amount shown is actually only half the amount being contributed. Double the number and translate it to an entire month. If we stay with the thousand dollar average check from earlier, you will see that the ratios are correct. Remember that the half your employer is required to contribute simply increases the price of everything you buy.
The demographic trends described above are real. We as a society are having fewer children. With the disability benefit and other welfare programs we have removed otherwise productive people from the work force. Add the increased level of medical knowledge with the benefit of people living longer, and you have created a fiscal time bomb. The current program is simply unsustainable without a major reduction in benefits, a major tax increase or both.
What about the "trust fund?" Well, unfortunately it does not exist in the sense of something real. Bill Clinton's budget document of the 2000 fiscal year described it this way: "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." Such honesty makes you appreciate the two party system! Recently the Associated Press published an article about the existence of the trust fund. They found it to be a single ledger book in a file cabinet in a government office in West Virginia.
It is true that from 1939 until 1968 Social Security had a separate account at the Treasury. In fact it was not included in the yearly budget at all. In 1968 then President Lyndon Johnson thought the budget, constrained by our involvement in Vietnam, might look a little better with the extra funds the payroll tax was generating. So, as of 1968 Social Security simply became another budget item. Everything collected as the payroll tax is immediately spent, either on Social Security, Medicare or something else. Social Security has always been and remains a pay-as-you-go program. The bottom line is quite simple. The system as currently configured will have to change. Our options are myriad. Here is a short list:
1. Increase the retirement age (again), therefore reducing expenses over time.
2. Tighten the requirements for disability. (or eliminate the program entirely)
3. Continue to increase taxes on payrolls.
4. Reduce or eliminate survivor benefits.
5. Allow people to opt out of the entire program. (this is already an option for religious leaders.)
6. Allow people to divert part of their payroll tax contributions into individual retirement accounts, therefore reducing future obligations.
7. Change the way benefits are calculated using something less generous than the current wage indexing formula.
8. Eliminate the early retirement option.
9. Eliminate or reduce benefits for the wealthy.
10. Take your pick of a mixture of the above.
One thing is certain. The program cannot be maintained without substantial change. Demographic trends and and the generosity of the Congress have assured that there will be no money in the future. We will be wise to accept small changes now in order to avoid certain fiscal catastrophe in the future.
Comments Are Appreciated
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