Modify Social Security
During the depression, Franklin D. Roosevelt introduced the Social Security program in hopes of it providing insurance to what would inevitably happen in our lives. Established in 1935, it was geared to be solely a retirement program and quickly in 1939 added survivor benefits to the list; then insurances for the disabled in 1965. The original purpose of Social Security Act was to establish a system for the old-aged and adequate provisions for survivors of the dead and the disabled. The Act itself had good intentions of creating a sound Social Security board and increase revenue. According to www.ssa.gov, “The new social insurance program the Committee on Economic Security (CES) was designing in 1934 was different than welfare in that it was a contributory program in which workers and their employers paid for the cost of the benefits--with the government's role being that of the fund's administrator, rather than its payer. This was very important to President Roosevelt who signaled early on that he did not want the federal government to subsidize the program--that it was to be "self-supporting." He would eventually observe: "If I have anything to say about it, it will always be contributed, both on the part of the employer and the employee, on a sound actuarial basis. It means no money out of the Treasury."” From the time the Social Security program was establish in 1935 to 1960’s the payroll taxes increased from 2% to 6%. Then in 1972 the cost-of-living-adjustments were introduced to keep up with the inflation rates and the payroll taxes were then increased to 9.2%. The group that was born from 1910-1916 reaped the repercussions due to a mistake in the formula used to estimate the rate of inflation. The formula was flawed and the benefits rose quicker than the inflation rate. The mistake was corrected in 1977, at this point they raised the payroll taxes again to 9.9%, and Social Security was thought to be actuarially solid. The differences between those born from 1917-1921 and the ones before is known as the “notch” and considered unjust from the latter group. In 1983, the National Commission on Social Security Reform was created in hopes of fixing the actuarial uncertainties that were so evident. The group wanted an increase in the self-employment tax, partial taxation of benefits to upper income retirees, expansion of coverage and to increase the retirement age. At this point, they once again swore that the Social Security program was confident in its actuarial duties and payroll taxes increased to 10.8%. For the remaining time of the 80’s, the Social Security Trust Funds were moved so that they could be tracked separately and the cost-of-living-adjustments were increased to balance the inflation; payroll taxes remained at 11.4%. Not until 1993, did the amount of taxable benefits for upper income retirees increase to 85% and the payroll taxes increased to 12.4%. By the end of the 90’s the Social Security Trustees’ Report informed that the system had unfunded liability that had totaled out to more than $19 trillion dollars. Should we cut Social Security, a program that was put in place to protect our future? The words used in the question are a part of the problem. Every politician seeking votes to stay in office will say “I will not vote to cut a program put in place to protect the future of hard working Americans.” Aside from continuing to support the idea that Americans are entitled to a retirement benefit provided by the government, the politicians are missing the point. The idea is not to cut Social Security but to modify it. To do that we must choose some representatives who are more interested in the future of America than in keeping a job which was also never intended to be permanent.
In The Social Security and Medicare Handbook, written by V.R. Leonard, he speaks of the Social Security as an endangered species and then asked the question “Why?”. According to the handbook, “the future of Social Security rests on the fact that the proportion of today’s spending, almost one-fourth of the federal budget. It is projected to increase dramatically. Medical and health care costs will also continue to increase. Some people believe that this, along with a rise in population and increased investments in private pensions and health plans, spells trouble. This means the number of employed people paying into the system might decrease. When that happens, experts think the number of older people in the United States will more than double. Because of the Baby Boomers increased life expectancy, some say demand for money will rise. It has also been suggested that because of a sharp decrease in the birth rate, that less workers are born to pay later. Social Security will generate less money and filling the gap between less workers and more beneficiaries is what presents a problem.”
Based on my research, it appears that Social Security has failed to remain true to its purpose and has been coopted along the way for other purposes. Social Security was designed as a safety net at a time when few Americans had life insurance and private retirement programs were practically non-existent. The circumstances in our country are not the same today as they were in the 1930’s. While it may not be a majority of the population, many Americans have life insurance either as a result of personal purchase or as part of a compensation package from their employer. The same is true of retirement programs. “The system is designed to work like a pension plan. The majority of Social Security recipients-approximately 60%- receive Social Security retirement benefits due to retirement (28).” Many Americans are also covered by private retirement programs as a by-product of their employment and/or they are personally depositing into individual retirement accounts. As with many predecessor “safety net” programs (Welfare, anyone), Social Security has become an entitlement and as a result it has impacted the choices and behaviors of many working Americans. Anecdotal evidence from employers supports the idea that many American workers elect not to participate in private retirement programs which require employee contributions in order to receive a matching contribution from their employer because they may “just rely on Social Security”.
These circumstances certainly lend themselves to alterations or modifications in the existing Social Security system. While the government may say that the system has been actuarially sound at various points in time, local professionals are extremely skeptical of that position. I interviewed a representative of the local firm Actuaries & Associates, a firm specializing in the areas of retirement plan design, regulatory compliance, and actuarial soundness, and one comment was “if we advised a client to operate a pension plan on the same (actuarial) basis as the Social Security system, we would be out of business, in jail, or both”. The representative went on to say that there are too many contingencies for benefit payments from the Social Security system which have not been factored into the rate of contribution over time, there has not been a proper adjustment to the rate of contribution for people entering the workforce later in life than others, and, primarily due to political pressure, there has certainly not been a proper adjustment to the rate of contribution in accounting for the continued increase in life expectancy. A final and telling comment was that “Social Security would have eventually reached a crisis without the ‘Baby Boomer’ event and at some point the Social Security ‘Ponzi scheme’ will have to be unwound. Benefits which are currently in pay status should be honored but there is a method for removing a large portion of future retirees and the majority of their contributions from the current system by adjusting for participation in private retirement programs.” In other words, just as Social Security entitlement has altered individual behavior and choice regarding personal preparation for retirement or death, the lack of that entitlement will result in a corresponding change in personal preparation and personal accountability regarding retirement and death.