A hot topic since President Bush laid it all on the line in his domestic agenda at this year’s State of the Union address, Social Security has become the fodder for the flames of Democratic Party anger toward the president and a call to action for the Republicans. If you spend any time following this issue, you more than likely have become very exhausted and confused; the title of this feature is probably not too much of a stretch. Despite the distractions, there is a real issue behind the smoke-and-mirrors of everyday politics: Social Security. What is it? How does it work? And with all that is being said about it, is there a problem with this social system? Well, let’s explore it. We’ll start in 1934.
Automobiles were as innovative as TV phones are today; our country was deep in the throngs of a severe economic depression; population was 132,164,569 (we’re more than twice that size today); and as women history professors enjoy contrasting with our generation, a majority of women did not work outside the home. President Roosevelt’s “Contract with America,” so to speak, was rich with modern, maternal, pro-government thinking. The recipe was simple really: apply the vast wealth and credit-worthiness of the great USA, add the power of reasonable taxation, inject a spoonful of socialism, and viola! Social Security was born. All an apple-pie, white-picket fence American had to do was work hard, trust that the Social Security tax taken out of every paycheck was secure for their future—because we obviously couldn’t be trusted to finance our own retirement—and upon retiring, kick back and rely on this desirable government subsidy.
As beautiful as this theory sounds, it has gravely failed the hard-working class of this country and is poised to bankrupt not only our eroding trust in government but our retirement future as well.
Many people do not understand how Social Security could possibly be or become bankrupt. Logic dictates that if Social Security taxes are taken out of one’s paycheck that they go directly to the Social Security Administration (SSA), similar to a huge savings account. If Jimmy Taxpayer pays $100 in 1980, then that $100 should be available in 2005 with interest. Well, to no surprise, logic does not determine government operation. Here’s how the system really works. I’ll try to make this as simple and understandable as possible.
Basically, when Jimmy pays his $100 to the Feds, that $100 does not go into the SSA’s bank account; it goes directly to the Federal Government’s General Operating Fund. From there the Congress “borrows” that $100 from the SSA by withholding the money from them and issuing 10-year Treasury Bonds in its place, for which the SSA holds. That’s why you hear every year around budget time, “raiding Social Security,” because it really does happen. As retirement checks become due, the SSA cashes in the bonds, at—get this—1.5 percent interest and distributes checks to our nation’s elderly and disabled. Also, as some people innocently think, worker’s payroll taxes are not saved in an account with his or her name on it for their retirement. Does any of that sound right or possibly efficient?
Despite backward means of managing SSA money, that in itself has not crippled the system. Consider the following factors: there is now a longer life span of Americans (most Americans in the 1930s and 1940s did not live to the retirement age), the number of retirees grows faster than the number of workers (currently 3.3 Americans work for every retiree—it was 16:1 in 1950), lower-paying jobs leads to lower tax collection, higher benefits go to seniors, benefits are tied to wage growth not inflation, and in three years the first generation of Baby Boomers will be retiring, further straining the system. Can you start to see why this has become such an issue?
All of this plus rising inflation, low dollar value and excessive government spending and borrowing will lead the SSA to a financial quagmire as early as 2018. According to the Social Security Trustees, in 2018 the SSA will be paying out more than it takes in from that year forward. By the time you and I are set to retire in the 2040s (that’s weird to think of), the SSA will be completely insolvent.
Is there a silver lining to this government program gone haywire? Well, President Bush has taken this issue to the forefront of his domestic agenda and has proposed some dramatic and bold changes that would buoy this archaic structure. The largest and most politically divisive are Personal Retirement Accounts (PRAs).
These accounts would not start all at once. They would begin with older Americans and eventually phase to all of us. Every worker would have the opportunity to set aside 4 percent of his 12 percent Social Security taxes to his PRA. More than 8 percent of those taxes would still go to the SSA. A PRA would also be completely voluntary. Only those who want the freedom of more of their taxed money under their own control would get it. (Yes, I know that sounds like an oxymoron.) The PRAs would be managed similarly to a company stock investment account, with authority delegated to an administrator company, which would choose and monitor safe, low-cost, broad-based investment funds. Do you think you could get a better interest rate than 1.5 percent off your 4 percent than the government does off 12 percent?
Don’t be easily swayed to one side or the other, either. The president’s plan is no perfect solution, just as Social Security is no perfect government program. At least, however, he has been bold enough to bring this topic to the forefront. What must take place now is open and honest dialogue about what is best for our nation’s current and soon-to-be retirees, young workers like you and me, and those coming after us. Is the solution more taxes? PRAs? Eventual termination of Social Security? The answer is really up to you. Will you take the time to be an informed citizen, listen and logically debate the issue, and contact your representatives in Congress? Or will you simply bend over to the lethargic apathy toward government that has infected our generation and let your future be whittled and spent away? The future is yours. Do something about it.
To become a more informed citizen on the topic of Social Security, check out the following resources: