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Section: Being Well
If It Ain’t Broke, Don’t Fix It
By Roger Cook
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ca. 1930’s Social security poster.
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The Bush Administration is planning a major overhaul of Social Security. It’s going broke they say, and if we don’t do something fast, there won’t be benefits for seniors in the not-too-distant future. But is it really going broke? Some experts don’t think so, cautioning that, “If it ain’t broke, don’t fix it.”
In the early 1930s, during the height of the Great Depression, if you were retired and had a spouse and other dependents, or if you were in the family of a breadwinner who had died, or if you had a long-term disability, there were no government benefits to help you—you were on your own. In 1935, under Roosevelt’s New Deal, the Social Security Act was passed to provide an income floor for retirees, their survivors and the disabled.
The whole idea behind Social Security was to provide a basic but sustainable income for retirees and other beneficiaries. It was set up as a social insurance program. You were guaranteed a Social Security check every month. Each year the amount you received would increase to keep up with the rising cost of living. You would receive benefits for as long as you depended on them. But, Social Security wasn’t a free lunch—employees and employers would both be taxed, and those funds would support retired workers and other beneficiaries. Higher income workers would contribute more and would also receive more benefits.
President Roosevelt never considered making Social Security a private investment program, where a portion of your benefits would be set aside to invest in the stock market. The Depression was a cruel teacher—millions of Americans whose stock was up in the 1920s became victims of the 1929 market crash. Their life’s savings were wiped out. Many were destitute. Wall St. wasn’t exactly popular. But Social Security was popular because you could depend on it being there when you needed it the most. Everybody paid, everybody benefited and lower income workers, when they retired, knew they wouldn’t fall into poverty.
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President Franklin
Delano Roosevelt.
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Today, Social Security remains a monthly lifeline for retirees, surviving spouses and their children and the disabled. Forty seven million people receive Social Security benefits, including 33 million retirees. Nearly two-thirds of retirees receive at least half of their income from Social Security. For one-fifth of retired Americans, it’s their only source of income. Without Social Security, nearly half the aged beneficiaries would be in poverty. The poorest Social Security beneficiaries are generally older women, particularly minority widows.
Clearly, Social Security is a government program that works—a modest amount of taxing and spending can make people’s lives better and more secure. But some argue, including President Bush, that Social Security will go bankrupt before mid-century and that it needs to be overhauled.
Similar concerns were raised two decades ago. It was feared that the payroll taxes being paid then were insufficient to cover the bulging “Baby Boomer” population who would begin collecting in 2011. Payroll taxes were modestly increased to create a surplus “trust fund.” Today the fund is worth over $1.71 trillion—enough to cover the “Boomers” and future recipients.
But, Social Security trustees claim that the trust fund will go broke in 2042; the Congressional Budget Office suggests 2052. Whichever prediction is true, it is clear that if the trust fund disappears, future retired beneficiaries will have to rely entirely on payroll taxes that are being paid directly into the system at that time. It’s projected that those revenues will cover 81% of promised benefits—that’s more than what current beneficiaries receive in today’s dollars, but less than the full scheduled benefit.
Some argue that future benefits can be pretty-much maintained by slightly tinkering with the system: additional payroll tax revenue could be generated by raising the current ceiling on taxable income (right now, it’s capped at $88,000)—that could cover three quarters of the shortfall; taxes on estates worth $3.5 million or more could be retained and the proceeds dedicated to Social Security; or payroll taxes could be modestly increased. A combination of these measures could easily close the revenue gap.
The Bush Administration has another idea: allow workers to voluntarily divert some of their Social Security taxes into a private retirement account they control. They could invest that account in the stock market, creating a nice nest egg for their retirement. In the long run these investments in the financial markets would yield higher earnings than the modest benefits paid out under Social Security, they say.
Critics disagree. First, money diverted into the private accounts reduces revenues for funding Social Security benefits. Beneficiaries will either have to take a hit or the government will have to borrow $1 trillion or more to maintain scheduled benefits for the “boomer” retirees—some estimate trillions may have to be borrowed farther down the road. With the current national debt at over $7 trillion, it seems more likely that benefits will be cut rather than trillions borrowed to maintain them.
Second, the stock market has its ups and downs—investments are a risky proposition, especially for inexperienced investors who could end up with little or no money in their private accounts and reduced benefits when they retire. Social Security benefits, on the other hand, increase every year to keep up with inflation and you’re guaranteed benefits when you retire.
Third, investors who hire brokers will pay fairly large fees for these relatively small investments, fees which could reduce investment earnings significantly.
Fourth, higher income earners pay more taxes into Social Security than lower income earners. These higher earners are helping to maintain benefits for lower income earners. It is these higher income earners who will most likely voluntarily invest part of their payroll taxes if given the opportunity, money which would otherwise have gone into maintaining Social Security benefit levels. Again, every Social Security beneficiary will likely suffer a benefit reduction.
Fifth, once the “nest egg” that a retired beneficiary has accumulated through his/her personal account is drawn down, Social Security won’t add additional funds to cover that source of income. By contrast, regular Social Security benefits are paid as long as the recipient needs them.
The Social Security debate has already begun. It’s a debate worth watching.
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