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For over 65 years Social Security has provided a vital floor of protection for many Americans. Its broad range of retirement, disability, and survivors' benefits for millions of Americans makes it an important issue for people of all ages. But changing demographics render the current pay-as-you-go system fiscally unsustainable and generationally inequitable over the long-term – something we have known for decades. Reversing this trend will require facing up to some hard choices and making far-sighted decisions – something Sean O’Kane is willing to undertake whereas Judy Biggert would prefer to put it off and ignore it. The sooner we face up to this difficult task, the better. The long predicted “future of unsustainable payouts” is starting THIS month. As presently constructed, Social Security is a grossly illiberal system that is increasingly an economic drag on the institutional foundations of American society. Any reconstitution of this system will require a combination of:
- income adjustments through tax revision – one that does not inhibit economic growth through increasing marginal rates.
- payout changes through benefit adjustments
- Opt-out abilities for younger workers
- age requirement revisions
- a transition to a largely privately-funded system that alleviates the primary system of the obligations of imbalanced payments in the long-term
- Increased incentives for IRAs, HSAs, MSAs, and all Individual Accounts
- a system that supports and encourages economic growth, not inhibits it.
The largest problem with Social Security is not simply its incredibly horrid finances, it is the enormous lie that the political class has foisted on generations of Americans. A system that was always “money-in, money-out” or pay-as-you-go defined benefits has been presented for decades as a “fund” with “trust” deposits. Millions of people have uttered the phrase “I paid in” as if they have a deposit-savings account somewhere protected by the Government. They do not. Well, it should come as little surprise that Congress – an institution with trust ratings around 12% - has been raiding the Piggy Bank for decades. The so-called “third rail” of politics was talking at all about Social Security: “Don’t tell the old ladies we’ve been lying to them!” We are not convinced that senior Americans are so callow or selfish to not want to face the real facts of a system from which they presently benefit. Nor are we convinced that pre-retirees are so stupid or economic illiterate that they cannot understand the Ponzi scheme of Social Security any less than they compute their odds in Fantasy Football or at the Bingo Hall. Point direct: being honest with Americans is the duty and responsibility of our elected officials. The shallowness of our media – interested more in the ephemera of fame and moment – will only slowly respond to the educational task of informing people of these crucially vital issues once some political courage is demonstrated. Unlike the present representation of the 13th Congressional District, Citizen O’Kane will deal honestly with constituents in facing the political intractability of these financially unstable arrangements. The work on the future must begin now, but it must begin. A new generation of Republicans is willing to adhere to fundamental Republican principles of limited government, individual liberty and free markets in finding a solution most fair for present recipients of Social Security and laying the framework for long-term economic growth and stability. Change it must.
Today, Social Security taxes are running ahead of benefits by about $70 billion. But by 2009, the annual excess will start to fall and by 2017 there won't be any excesses at all. From then on, widening deficits are projected for as far as the eye can see. At first, the gap between promised benefits and dedicated revenues will be relatively small -- $9 billion in 2017 -- but it will grow very quickly as Baby Boomers begin to retire in large numbers during the 2020s. The first wave of Baby Boomers born in 1946 are now 62 years old – the first senior born on January 1, 1946 is eligible for their first check in February 2008. The Future is Now! The beach has emptied, and the tsunami is coming – quickly, steadily, and inexorably.
The Social Security Trustees project that the annual shortfall will grow to $256 billion by 2030 in inflation adjusted dollars and that the program's cost will grow from roughly 4.3 percent of the nation's gross domestic product (GDP) today to 6.1 percent in 2030. While seemingly a small increase, it means Social Security will draw nearly half as much more out of the economy in 2030 as it does today. Expressed as a share of workers' pay (taxable payroll), Social Security will grow from about 11 percent today to nearly 17 percent in 2030. This means the Social Security program will require 50 percent more from workers' wages as it does today – in just 20 years!
Part of any solution to Social Security requires an increase in National Savings and a decrease in the number of people who rely primarily on Social Security for old age income.
Parameters of a System of Transition to Defined Contribution Private Plans
- Current workers could be free to choose either the private option or Social Security. For those who choose the private plan, workers and employers will each pay 5 percent of wages, instead of the current Social Security payroll tax of 6.2 percent for each, into private investment accounts, resulting in an eventual payroll tax cut of 20 percent. Besides supporting retirement benefits, the accounts would finance private life and disability insurance, thus replacing Social Security survivors and disability benefits.
- Workers who opt out of the current Social Security system would receive recognition bonds from the federal government that would pay them a proportion of future Social Security benefits equal to the proportion of lifetime taxes they had already paid.
- Benefits promised to current retirees would be paid in full, with no reduction of any kind.
The biggest objection to privatizing Social Security has been the transition to a privatized system. But the projections of the fiscal impact of the plan offered in this study show that the transition can be financed without new taxes and without cutting benefits for today’s recipients.
Indeed, the yearly transition deficit would be offset after about 14 years. After that, the privatization reform actually starts producing a surplus for the federal government. About 20 years after the reform is begun, that surplus would be large enough in 2006 dollars to eliminate completely a federal deficit as large as today’s.
Recommended Readings:
Project on Social Security Choice
National Savings http://www.concordcoalition.com/issues/socsec/issue-briefs/SSBrief5--IncreaseNationalSavings.htm
Personal Accounts http://www.concordcoalition.com/issues/socsec/issue-briefs/SSBrief8--Voluntary-or-Mandatory.htm
Status of the Social Security and Medicare Programs – SS Trustees 2007
http://www.ssa.gov/OACT/TRSUM/trsummary.html
Reason Magazine - The Death of Social Security
Social Security has three big problems, all of which can be solved by allowing Americans to invest – on their own – part of what they are now forced to send to Washington.
Reason Magazine - Social Security as Social Engineering
Social Security reform is essentially an effort to reorient the relationship of Americans to their government: not as provider, but as partner in the adult task of planning for old age.
Reason Magazine - Social Security's Progressive Paradox
Again, from a pure policy perspective, Social Security makes little sense except as a modest welfare program. There is, after all, no earthly reason why most middle class or wealthy citizens need the government to garnish their wages for decades and then provide a retirement benefit later: People are generally perfectly capable of saving for their own retirements.
Reason Magazine - Opting out of Social Security
While being allowed to opt out of Social Security is doubtless still a long way away, Oregon is taking the first tentative steps toward downsizing the failing federal program to the state level.
Reason Magazine - Clash of the Titans
The coming collapse of Social Security pits the Baby Boom against the New Deal.
Reason Magazine - The Real Beginning of the End of the 20th Century.
First Baby Boomer applies for Social Security--first check to arrive in February 2008.
Reason Magazine - Campaigning To Bust the Budget
Only Fred Thompson has been willing to risk the wrath of the elderly by calling for a cut in the growth of Social Security.
International Comparisons
As bad as the US Social Security System is, America’s problems are not as acute as those of Europe or Japan – largely thanks to younger immigration from Latin America. As some have colorfully observed about the more buoyant long-term prospects for the US versus Europe or Japan, at least in the United States new immigration provides “the young and the brown to pay for the old and the white…” Whereas Social Security does have features that are identifiably operable in certain demographics, this line does crisply point out several concurrent trends of ethnic change in the US and funding of our largest entitlement system.
However, globalization means that America needs to compete everywhere, and the more sound and secure our retirements and pensions, the more effectively we operate in the global economy.
The Largest Holders of US Public Debt
Savings & Social Security Intersections
Théopiste Butare, “International Comparison of Social Security and Retirement Funds From the National Savings Perspective,” International Social Security Review 47 (2), 17–36. Geneva (April 1994) [doi:10.1111/j.1468-246X.1994.tb00398.x]
Jonathan Gruber, David A. Wise Contributor, Social Security Programs and Retirement Around the World, University of Chicago Press, (2004) [ISBN 0226310183].
Data Sources:
Foreign holdings of U.S. Treasury securities: Treasury International Capital System, U.S. Department of Treasury’s Office of International Affairs. Part I.A.3. http://www.treas.gov/tic/ Every quarter the US Department of Treasury publishes figures on foreign currency transactions and gross foreign indebtedness.
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