SocialSecurity
AdaptedfromPublicAgenda(
Introduction
Social Security,thenation'sretirement system,isoneofthemost popular government programs in U.S. history. But nowthat the firstofthe76millionbabyboomers have startedretiring –and areprojectedtolive longerthan anypreviousgenerationof Americans–thequestion ishowthisprogram can be sustained.
Anestimated 10,000peopleadaywill become eligiblefor Social Securitybenefitsoverthe next two decades,puttingan unprecedented strain onthesystem.In lessthan a decade, in
2017,Social Security isscheduledtostart payingout more in benefitsthan it collectseach year inpayroll taxes. If leftalone, theSocial Securitytrust fundisprojectedtorun dryin 2041. Sometimespeoplesaythesystemwillbebankrupt at that point, butthat isn't really true.Social Securitywouldstillreceivetaxrevenuesand still function–but it couldpayonly about three-quartersof promisedbenefitstoretirees.
Nearlyeveryone supportskeeping it going, but noconsensushasemerged, either in Washingtonor amongthepublic at large,onwhat approachthegovernment shouldtake. At thesametime,Americansasanationonlysaveaminisculepercentageoftheir income,andindividual investment plans(likethepopular 401K) havebeen batteredbythe dipin the stock market.That mayleaveAmericans' own resources dwindlingeven asthegovernment safetynet beginstofray.
HowSocialSecurityWorks
Nearly all Americansover 65 collect monthlySocial Securitybenefits,thebackboneof the nation'sretirement incomesystem.Social Securitywasoriginally designedtoprovideoneleg ofa"three-leggedstool"for retirement security,theothersbeing savings and apension. Now, however,asmanycompanies havemoved awayfrom traditional pensions andfewer people haveadequatepersonal savings,Americanshavebecomeincreasinglyreliant onSocial Security.
TheSocial SecurityAdministration saysthatabout athirdof therecipientsdependonSocial Securityfor morethan90percent of their income,whileanother thirdrelyontheprogram for morethan half of their money.The agencyestimatesthat about 13millionwouldfall below thepovertylinewithout Social Security.
Social Security isa"pay-as-you-go" insuranceprogram, meaningthat the current workforce paysfor thebenefitsofthe current retirees. And, eventually,whenpeoplewhoareworking now becomeretirees,their benefitswill bepaidbythosewho areworking in thefuture. Employeespay6.2 percent of everypaycheckasa“Federal InsuranceContributionsAct(FICA)tax,” whichfinancesSocialSecurityandMedicare. Employerspaythesameamount as well. Sotoday'sworkerswon't get back "their"moneywhen theyretire;themoneytakenout oftheir paycheckstodaygotothosereceivingSocial Securitytoday.
Americansbecomeeligiblefor Social Securitybenefits atage62. But if theyretirethen, they receiveasmalleramount then than if theywait until age66, when full benefitskick in. Only about 5percent of retirees, however, wait until afterthey'vereachedfull retirement ageto claim benefits,preferringtotakethe decreased amount insteadof workingafewyearslonger.
TrustintheTrustFund?
If Social Securityisaforcedsavingsaccount, it isamagical oneindeedbecause it never runs out aslongasweorour spousesare alive.We continuetoreceivepaymentslong afterwe’vegottenback themoneyweput in. TheaverageSocial Securityrecipient getsback what heor sheput intotheprogram within thefirstseven yearsofreceivingbenefits.Andsincethereis nomeans-test for Social Security,not onlypoorrecipientsbut alsobillionairescancontinue to collect this direct subsidyfrom taxpayers.Andsincebillionairesandother wealthypeople onlypaidSocial Securitytaxesonthefirst$102,000oftheirannualincome,they didnot even contributeproportionately.
HowisthisbottomlessSocialSecurity“savingsaccount”possible?Whydoesn’titrunoutlikearegular savingsaccount? Sofar it hasworkedbecausethenumberofpeoplein thework forcehasbeenabletocovertheretirement expensesofthoseleavingit.Withthebaby boomersstillin theworkforce andpaying intothesystem,Social Securityhasbeenrunninga surplus.To storethisextramoney,thegovernment set upa“trustfund.”ThisSocial Security TrustFundgotfat becausethepool of workersgrew fasterthan thepool of retirees.
In 1950, therewere16workerstosupport everyonebeneficiaryofSocial Security.Today, however,thereareonly3.3workersfor everyretiree.By2030,theratiowill fallto an estimated2.2 workersper retiree. Fewer workerstodaywill mean fewerSocial Security dollarslater,when thosesameworkersretire.When thesystemstartstofall shortoftax revenuein 2017,Social Securitywill be ableto draw onthistrustfundtokeeppayingfull benefitsuntil 2041.
Theproblemisthat thistrust fundisn't billionsof dollars in cashsitting in abank somewhere. Thefederal government hasborrowedthesurplusmoneyfrom thefundtopay its year-to-year bills,givingthefundTreasurybonds in return.There'snothing illegal or secret about this. But what itmeansisthat when thetrust fundneedsitsmoney in 2017,the government willhavetopay it back. Therisk isn't that Social Securitywon't pay itsbenefits, at leastnotfor alongtime; it'sthat the cost of keepingupwiththosebenefitswill put an increasing strain onthefederal budget. That meansthegovernment mayhavetoraise taxes or cut other programstokeepSocial Securitygoing.
DodgingBullets,DeferringReform
Over theyearstherehasbeensomebipartisansupport for lookingat thelong-termfinancial healthoftheprogram.Most expertssaythesoonerwedosomething, the easierthe changes will befor everybody.The Social SecurityTrustees saythat if thegovernment wereto act now, theprogram couldbe maintainedas isfor another 75yearsbyeither cuttingbenefitsby13 percent, or raisingthe payroll taxbyabout 16 percent. But if thegovernment weretowaituntil later,thetaxincreaseor benefit cutswouldhavetobemoredramatictogetthesame effect.
Prominent recent proposalstofixthesystemreflect thebipartisandesiretomakereform as painless aspossible.Onepossibility istoraisethe caponincomesubject totheSocial Security tax— currently$102,000. Another istomaketechnical adjustments in theConsumer Price Indextoreflect thewidely,though notuniversally,sharedview that theindexoverstates inflation. SinceSocialSecurityrecipientsget cost-of-living (COLA) increasesbasedonthe index, a changein theCPI couldreducethecost of theprogram.
Other proposalswouldredefinethe contract tomakeSocial Securitysustainable. Theyinclude reducingbenefitsfor upper-incomeretirees,whogenerallyhavetheir ownretirement accounts, and/or graduallyraisingthe ageatwhich individualsqualifyfor full retirement, thusreducingthenumber of yearsin theprogram per person.
Still other proposalshavecenteredonusingthestock markettoincreasereturns, eitherby having thegovernmentinvest part of theSocial Securityfundor allowing individualsto doso in privateinvestmentaccounts.PresidentBushtried–butfailed–to dojustthat.His proposal wouldhavepartiallyprivatizedSocial Securityby allowingAmericanstoinvestsmall portionsoftheir SocialSecuritytaxes in themarket(in most plans, about 2 percentagepoints ofthe12.4percent tax), withtheremaindergoing intothe existingsystem.
Proponents, includingPresident Bush, arguedthiswould allow peopletotakeadvantageof thegreaterlong-termreturns possiblein the stock market–butofcourse, participantswould run therisk oflosingmoney if theymakebadinvestments.Critics,includingformer Federal Reserve Chairman Alan Greenspan,arguethat Social Security's investments in thestock marketwouldbevulnerabletopolitical influenceandwouldgivethe government toomuch control overthe economy.A privateaccount planwould alsocost alotof moneyupfront, becausethe moneyshiftedintoprivateaccountswouldn'tbeavailabletopay current benefits, sothegovernment wouldhavetomakeupthe difference.
Some expertswouldtakeprivatizationevenfurther, byscrappingSocial Security in favor of mandatoryretirementsavingsaccountsona modelpioneered byChileand sinceadoptedin variousforms byAustraliaandtheUnited Kingdom. Workerswouldberequiredtoput their money intotheaccounts,justasthey arerequiredtopaySocial Securitytaxes, but would decidehowtheir contributionswouldbeinvested. Thegovernment wouldguaranteeacertain minimum pensiontoeveryone, but someretireeswouldbenefit morethan others.
ThePublic'sView
Surveysfindthepublicisnot inclinedto confront thepainful possibilitythat benefitsmay needtobescaled down, ortaxesraised, tosustain Social Security.Most Americans are convincedthatif Social Securitywererun moreefficiently,theprogram couldbesustained without hardchoices.
But mostAmericans dorecognizetheseriousnessof theproblem. Pollsshow thatthepublicis not confident theSocial Securitysystemwillcontinuetoprovidebenefitsofequal valueto thosereceivedbyretireestoday,withyounger andlower-incomeAmericansmuchmore worried about theprogram than senior citizens.
Only about 3percent of Americans,however,rank Social Securityreform asamongthe most important issuesfacingour nation, laggingfar behind thewarinIraq or Afghanistan, the economy,health careand immigration.Eventhough most Americansacknowledgetheloomingproblem,most still haven't acted aggressivelytosavefor themselves.Thepersonalsavingsratehas plummetedoverthepastdecade--and,in fact, in recent yearsAmericanshavebeen spending morethan theysaved,thefirsttimethat'shappenedsincetheGreatDepression.
Butwhat changesareacceptable?Althougha solidmajorityofAmericansagreesthat Social Securitywill gobankrupt if costs aren't reducedsoon,most oppose cost-cuttingoptionssuch as increasingtheretirement age,raisingpayroll taxesunlessor cuttingbenefits. Oneof the fewmeasuresthat elicitsmajoritysupport wouldbetoreduceSocialSecuritybenefitsfor high-incomefamilies.Higherincomeandhighlyeducatedpeoplearemorelikelyto favor planstoinvestSocial Securityfunds in stocks.
But surveysshow that publicsupport for investingSocial Securityfunds in thestock market or lettingpeopleinvest their ownSocial Securitytaxes canvarywidely dependingon how the question isworded.