A National Pension Plan Revisited
Financial constraints indicate that Social Security (SS) has a precarious future. Ignored is that Social Security history shows built-in failures that cannot be constantly repaired and only a National Pension Plan can provide a suitable and secure financial arrangement for retirees. Fortunately, SS already has the framework for a National Pension Plan.
Social Security's Built-in-Failures
The reason for the potential social security dilemma is well known; revenue will be insufficient to accommodate the needs of an increased senior population. From the day of its first payment, check number 00-000-001, issued to Ida May Fuller in the amount of $22.54 and dated January 31,1940, Social Security obligated itself to pay benefits that exceeded the contributions from the earliest retirees. Increase in life expectancy and constant cost-of-living adjustments additionally strained the Social Security fund. Despite payroll taxes (FICA) being greatly increased in 1983 to make certain that Social Security operated in the black, the payroll tax has remained insufficient to meet future demands. Because the retirements of the "baby boomers" will greatly decrease the ratio of workers to retirees, the nebulous Social Security "trust fund" will be empty in the third or fourth decade of the 21st century.
A chilling scenario awaits a nation with an aging population and a reduced birth rate. This scenario has partly arrived; wages have been relatively stagnant for decades, while an increasingly aging population solicits more social security funds. Fortunately, inflation has remained low - dampened by low oil prices, controversial statistics and decreased global demand for many products. Elevated unemployment for a lengthy time complicates the budgeting for retirees.
The present social security beneficiaries must either directly use their investments for expenditures or transfer equity investments to fixed income investments and live from fixed income interest, which has been low for years. Exit of the 'baby boomers' from the work force leads to Increased demand for fixed income securities, which drives up the price of these securities, drives down their yields, and ultimately lowers retirement income. Selling investments in Keogh Plans requires purchase of the securities by others. Employed workers, by adding to their pension plans, mostly perform this task, thereby maintaining security prices and subsidizing retiree finances.
With corporations deserting their original pension commitments and the U.S. government's Pension Guaranty Corporation rescuing the insured, with the stock market failing periodically and investment during those occurrences going strongly into U.S. government bonds, it is obvious that America's citizens are depending upon their government for an assured retirement income.
On paper, SS is being financed by FICA rather than by the general revenue fund. However, to workers, the FICA payment is only another form of taxation, and the result is the same as if they paid FICA to the general revenue fund. To them the FICA payments are the same as any tax.
In effect, the Social Security Retirement fund does not exist and cannot exist. If there were a fund that contained locked FICA deposits, immense purchasing power would be withdrawn from the economy and industries would suffer. The government must use the fund for its expenditures.
A similar analysis applies to pension plan investments. If wages are diverted to investments that churn in the markets and only continually raise asset prices, then another large amount of purchasing power will be diverted from the economy. Pension fund purchases of government securities release the investments to the economy. In effect, savings for future retirement guarantees future deficit spending.
Proposals for keeping the retirement system solvent continually circulate without decision. And yet, we have a lack of discussion on what may be the most critical failure of the Social Security retirement plan - It operates as a pay-as-you-go plan rather than as a true retirement plan. Changing its stature from pay-as-you-go to a true retirement plan might establish a social security system that is competitive with an annuity of a private industry plan and yield advantages that private industry plans cannot provide. Moving money from one accounting line (Social Security Fund) to another (general revenue), while maintaining the same result, resonates as a sleight of hand operation. It is a 'smoothie,' but the benefit of the change is that Social Security will become a true retirement plan, actuarially and financially.
Can Social Security Function as a Pension Plan?
Present workers are taxed to support retiree income from payroll taxes rather than from general revenue. Social Security determines the formula that shifts a portion of wage earners to retiree income. Rather than a "pay-as-you-go" system, SS has become an income distribution system, shifting a portion of income from earners to those who don't earn income. This shifted income is usually spent quickly and recirculates in the economic system. No matter how it is sliced, diced or construed, the present SS system is almost a National Pension Plan - the government raises funds by taxes and distributes these funds to give retirees a fixed income. The system only needs improvements; a more just retirement income for everyone and a certainty that the funds will always be available.
Social Security modified to a national pension plan has capability to provide pensions for retirees that give security, stability and an added advantages. Security results from the strength of the government system. Stability results from the guaranteed income. The added advantages is that government control allows quick adjustment of retirement benefits according to family status, cost of living and total income.
A modified framework for the Social Security system uses the forecasted expenditure for Social Security as a budget item in a unified budget. One modification would be to have tax revenue support the budget item termed Social Security Benefits. The individual's W-2 tax form would become an accounting entry for determining future benefits.
Placing SS benefits in a unified budget and making certain that the budget item is financed from general tax revenue has several advantages:
- The present payroll taxes are regressive and unfairly affect lower incomes. Income taxes are progressive.
- The Social Security budget is mandatory. If it must be increased, then other budget items can be decreased in order to maintain taxes at the same level. Taxpayers will not complain if more taxes are diverted to social security taxes as long as their total tax bill remains constant.
- Because Social Security is a major portion of the Federal budget, other budget items will be forced to compete with it and will have greater scrutiny. Wasteful and unnecessary budget items will be "under fire."
The SS system cannot escape the predictions that in the second decade of this century, its outlays will exceed its revenues. How will its own budget be balanced?
As of now, the distributions of payments to retirees are well accepted. Continuing those distributions and refining them as economic changes occur are a matter of priority, and assuredly Social Security should have first priority for the public. After all, Social security payments are only a transfer of payments from children and grandchildren to their elders--a family affair. Instead of family wage earners directly supporting their parents, the wage earners will be indirectly supporting them. In other words, no matter the costs involved, as long as they are reliable and sensible, the public will be prepared to pay them.
The costs of the retirement program have a greater return than other government programs. As mentioned previously, its payments are instantly recirculated in the economy and assist in moving the economy forward. Defense programs often result in production of weapons that don't benefit the economic structure. Many government programs are totally wasteful, resulting in no benefit to the American community. Foreign aid, that doesn't require purchase of American goods, moves money and resources out of the country.
Securing the National Pension Plan
The present Social Security Retirement System cannot be easily fixed and its built-in failures cannot be patched. Why continue with that system when a National Pension Plan tends to make Social Security more relevant, more simple and more equitable? By making SS a budget item, its solvency is resolved. Rather than treating social security as an adjunct to America's economy, it would be preferable to integrate the needs of the retirement community into the needs of the entire society. In a responsible society, resources are shared and so are sacrifices.
slightly updated feb, 2015
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