Updated: May 3, 2013 12:14PM
Originally published: August 7, 2001
The national debate over ``saving’’ Social Security takes center stage today with the start of a presidential conference in Washington, D.C.
It’s an issue that still astounds many people who were accustomed to decades of assurances that their Social Security benefits would always be safe and secure. When Social Security was first put into place in August, 1935, the payroll tax was just 2 percent, and the wage base - the maximum taxable income for Social Security purposes - was $3,000.
The maximum total tax on employee and employer was $60. Today, we pay 12.4 percent (split 50-50 between employee and employer) on a wage base of $68,400 - plus 1.45 percent for a Medicare tax on all income. Seventy-five percent of Americans have more money deducted for Social Security (FICA) than is withheld from their paychecks for federal income taxes.
It’s become a ``pay-as-you-go’’ system, with this week’s payroll taxes going directly into the benefit checks that will be mailed out next month. When Social Security started, there were more than 16 workers paying taxes for every retiree collecting benefits.
Today, there are just 3.3 workers per retiree, and by 2025 there will be only two. That’s the crux of the problem. With 78 million baby boomers set to retire in the coming decades, who will pay into the system, and how much money will be required? Even using ``average’’ forecasts of economic growth, the payout from the main Social Security trust fund will exceed the income from payroll taxes in just 16 years - 2015. By 2021, the trust fund will have to start liquidating its assets - U.S. government IOUs - to pay benefits.
And at that point, the government will have to raise taxes or cut spending to pay off those notes. By 2032, the trust fund will run out of assets.
What can be done to save Social Security? There are three basic choices:
1. Raise the payroll taxes. It’s estimated that an immediate increase in the payroll tax from the current 12.4 percent to 14.6 percent would solve the problem. But that places the burden squarely on the lowest paid workers. And the cost to the economy of such a huge tax increase might be a recession. One other consideration is to remove the ``cap’’ on the wage base for Social Security taxes. Currently, higher-income wage earners don’t pay FICA above $68,400 of wages. Requiring FICA to be paid on all wage income would raise a lot of money - but it would forever destroy the myth that Social Security is a retirement system, not a wealth-transfer program to fight poverty among the elderly.
2. Cut, delay or tax benefits. The retirement age is already gradually being delayed until age 67. Because people live longer these days, it is reasonable to further extend the retirement age. But that solution seems to hit hardest on those who do lower-paid manual labor and are least able to stretch out their working years. Formulas could be altered to reduce benefits. Government employees could be brought into the system to build the contributions base. Or, again, we could acknowledge that Social Security is not a universal retirement system - and simply tax or deny benefits to wealthier retirees.
3. Make changes to get better investment returns on Social Security money. This alternative is generating the most controversy. It’s apparent that Social Security is a bad investment. Setting the same money aside in stocks (at an average return of 10.6 percent) or even in bonds, would result in three to five times greater return, according to studies by Chicago economist Robert Genetski.
The question facing policymakers is exactly how Social Security money could be invested to earn a greater return.
Privatization: At one extreme, advocates say the entire Social Security system should be privatized for younger workers, allowing them to deposit their payroll taxes in private mutual funds accredited by the government.
This system has already worked well for 10 years in Chile, where workers now have a substantial stake in their country’s business - resulting in more productivity and cooperation. But this solution leaves the problem of funding current retirees’ benefits, which are now being paid by contributions from today’s workers.
Proponents of complete privatization argue that it would be less painful for the government to borrow money to pay the retirees today than it would be to wait another 30 years to reach the same conclusion. At least today’s young workers would have their own market-funded retirement accounts by then.
Government Investments: Others advocate allowing the government to invest part of the trust fund in the stock market. That concept raises the spectre of the government controlling big blocks of shares in American business - anathema to many in our system.
Partial Privatization: There are many innovative solutions that try to walk between the privatization and government investment scenarios.
They would allow employees to allocate a portion of each year’s Social Security tax to an approved mutual fund investment and part to traditional Social Security. But all of the market-based solutions share one problem - the markets. There’s no guarantee that the average annual returns of the past - about 10.6 percent including dividends - will continue in the future.
And there’s no guarantee that when any one person retires, the stock market will not be in a period of below-average returns. Remember that stock market investors from 1968 through 1986 barely broke even on an inflation-adjusted basis. And there’s concern that inexperienced investors might not make a commitment to ongoing mutual fund investments in the periods when the market does decline, thereby cutting their long-run returns.
Many observers say the current budget surplus of $300 billion creates an ``unprecedented opportunity’’ to make changes in the Social Security system. What should you believe - and do?
What you can and should be doing is putting as much money as possible aside in your private retirement plan - either the company 40l(k) or your Keogh or IRA - so you will be less dependent on Social Security in the future. Today, the poorest 20 percent of the elderly receive more than 80 percent of their retirement income from Social Security.
They’re almost entirely dependent on Social Security - and yet the average monthly check for current retirees is just $770. We cannot forget or forgo our obligation to those who have paid into the system.
But we also cannot create solutions that will make it impossible for today’s younger generation of workers to enjoy the rewards of their labor.
Overall, the answer is economic growth. Any solution that hurts economic growth would be shortsighted and counter-productive. That’s the one constant to keep in mind as you follow the debate.