Alternative Insight

The Social Security Debate
No solutions-just debates

A continual debate that goes nowhere has resulted in a Social Security system that continues towards catastrophe. The fallacies that describe the system and the misunderstood realities have skewed the debate on how best to resolve the problems facing the social security system. Placing into focus the "truths" and "realities" is the first requisite for devising a viable social security plan.

As many other western countries, the U.S. faces an increasing retirement population, increasing life expectancy, declining birthrate and less workers per retiree. Total OASI (Old Age and Survivor's Insurance) costs are forecasted to exceed payroll tax revenues somewhere in the second decade of the twenty-first century.

Social Security, better known as OASI-Old Age and Survivor's Insurance, should ordinarily be viewed in its entirety and not solely by its retirement payments. About 69% of the entire payroll payments are directed to retirement. Medicare Insurance gets ~19% and disability insurance gets ~12% of the payments. Historically, only 1% of the activity is used for administrative costs. Each OASI component has its unique problems. The first step towards resolving each component's problems is to separate them. This analysis will only discuss the retirement fund problem.

Fallacies confuse the Social Security (SS) discussion. Some of these fallacies:

The Retirement Fund
It's fallacious that the Social Security retirement fund can temporarily rescue the Social Security System or, at least, postpone its financial problems. All surplus retirement funds have been used for debt retirement and no retirement fund assets exist in any bank vault. The retirement fund has only a government pledge to redeem the "hidden" bonds which constitute the fund. These "hidden" bonds have "hidden" maturity dates. When Social Security expenditures become greater than income from payroll taxes, the government will be forced to acquire funds from other sources--either by increasing payroll taxes, selling bonds, using general tax receipts, etc. An acquisition of funds will occur independent of the amount the accounting indicates the government owes to the retirement fund. The debt could be one billion dollars or zero dollars. It doesn't matter. The government will take the same approach in any case. It will not specifically pay back its borrowings from a fund.

Is the "pay-as-you-go" system poorly designed?
It's become fashionable to accuse the "pay-as-you-go" feature of the SS system as a poor design and try to redefine the SS system as an investment vehicle to riches.Those who framed the Social Security Act intended to provide a system that would be self supporting from contributions and would provide only a minimum amount of security to those entering retirement in a delicate financial state.

"It is impossible under any social insurance system to provide ideal security for every individual. The practical objective is to pay benefits that provide a minimum degree of social security—as a basis upon which the worker, through his own efforts, will have a better chance to provide adequately for his individual security." -- From the Report of the Social Security Board recommending the changes which were embodied in the 1939 Amendments.

Out of necessity, the SS system evolved to what seems to be a "pay-as-you-go" system. Although designed so that each worker's contributions would be secured in an imaginary "lock box" until retirement, events doomed that design from the start. Early retirees, who had not contributed much to the fund still had to be paid an adequate retirement that exceeded their contributions. These payments reduced the funds available in later years. Inflation, which had huge leaps in the 1970's, required huge increases in FICA taxes to compensate retirees trying to exist on pre-inflation payments. An increase in longevity made it impossible for a worker's total payments to the fund to compensate for the monetary demands of longer lives. Eventually, the increasing financial demands of Social Security for retired workers had to be satisfied from payroll taxes of present workers.

Will Privatization Resolve the SS Problems?
Many factors make privatization an incomplete solution. The recent drastic and prolonged fall of the stock market, coupled with falling interest rates, has demonstrated the uncertainties and investment risks inherent in a privatization plan. The issue of how to translate the present system to a partial investment system, while still supporting retirees from all the FICA taxes in the present system, has not been resolved. Allied to this significant drawback to privatization is another similar drawback - it affects those who most benefit from the Social Security system - wage earners who worked at low wages and live on the margin. These persons cannot take the risks with a privatization scheme that might fail and not be able to provide them with the minimum funds to live in their retirement. Those who can risk some of their contributions are those who have the earnings capacity to invest some of their income in securities. Since the Social Security system doesn't have retirees receiving benefits in direct proportion to their contributions, and has the higher earners subsidizing the benefits of the lower earners, sidetracking some of the FICA taxes to a private plan will reduce funds for the low wage retirees. FICA taxes will have to be increased to provide the shortfall; the fault which privatization claims it will prevent.

Does the Present Social Security System deter net savings and capital formation ?
The direct transfer of funds from present wage earners to retirees has led to the supposition that present earners have reduced opportunities for savings. This might be true for individuals, but is it true for the entire economy?

Retiree spending and the government use of the SS surplus brings SS funds directly into the economy where these funds circulate, providing increased consumer demand, increased production, and jobs. The funds eventually settle into bank deposits as savings. The net savings and capital formation for the entire economy might be increased rather than decreased.

Has Social Security become a welfare system?
Social security funds are directed to those who have previously worked in the system, who have paid their FICA taxes and who have participated in creating economic growth for future generations. Characterizing a system that assists American workers as a "welfare" system cannot be correct.

As fallacies circulate and interfere with a proper assessment of the SS system, realities are neglected which further confuse the arguments.

Rather than a "pay-as-you-go" system, SS has become an income distribution system.
SS shifts a portion of income from earners to those who don't earn income. This income shift is usually spent quickly and recirculates in the system

Future Social Security benefits can be Inflationary
Considering that the total payments to retirees and their total expenditures will increase greatly in the near future, while at the same time the labor market will be decreasing, demand for staples and services might exceed supplies. At the same time, demand might slacken in other goods (furniture, large houses, appliances etc.) and these goods might suffer from deflation.

Future generations have a financial obligation to past generations.
Those working in the socio-economic system create technology, infrastructure and facilities that contribute to the progress of the system. They essentially have some ownership to that which they have created. Since future generations utilize these advances for their benefit, these generations are indebted to the past generations.

The public mindset has not prepared itself for old-age assistance.
Although receiving intensive attention, Social security has been approached as a patchwork of incentives and always subjected to criticism. The retirement community is created as an end of the system rather than an essential component of the system.

Having a sufficient financial base is the only actual problem for maintaining SS as a viable system.
America usually solves its problems with money, and the money can be there. What is not there are the wills of those who have the money and refuse to part with the money and give total support to the SS system. No consensus on how to raise the required funds exists because no groups are prepared to make the small sacrifices that can resolve the financial problem.

A viable Social Security system can be constructed without too much modification to the present system.

If the public accepts the original objective of the Social Security system as "to pay benefits that provide a minimum degree of social security," realizes its obligations to the retirement community, and perceives SS as an income distribution plan, then SS becomes a national pension plan financed from the budget. Presently, payroll taxes serve as accounting entries to determine future SS payments to the individual. The totality of the FICA taxes becomes a pool of funds to distribute as benefits to retirees with a surplus used to retire budget debts.

A new 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 graduated taxes on gross income support the budget item termed Social Security Benefits. The individual's gross income could become an accounting entry for calculating future benefits.

Placing SS benefits in a unified budget and making certain that the budget item is financed from gross income has several advantages:

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 is 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.

The most popular recommendation for resolving the SS budget issue has retirees working more years, possibly until 70 years of age before receiving Social Security. Considering that the original Social security Act did not consider a longer life span and healthier elder population, extending the age limit offers a satisfactory scheme. One problem with the scheme is that private industry has been retiring many workers at 55 years of age and has not been eager to offer positions to older workers. Other schemes: Raise the income limit of the payroll tax, cut benefits, raise payroll taxes to sustain the benefits, create a deficit. No SS budget balancing scheme has sufficient acceptance.

One reason no SS budget balancing scheme has sufficient acceptance is because the Social Security budget does not directly contribute to the profit system. The defense industry and foreign aid, where aid is given to countries to purchase American goods, are welcomed by the profit minded industries. As a matter of thinking, if the U.S. willingly subsidizes the purchase of American goods through foreign aid, what's wrong with guaranteeing purchases of American goods by aid to American retirees? The mindset of the country must be changed so that Social Security is perceived as an agreeable asset of the American landscape and not as an awkward nuisance that must be tolerated. Accomplishing that task is the first step towards resolving the Social Security system problem; which is mainly a financial problem. Once that task is accomplished, many recommendations for resolving the future financial situation will be forthcoming and the most tolerable will be accepted regardless of the sacrifices of the populace. Children don't work and we willingly take care of them.

alternativeinsight
june 1, 2002

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