Thursday, August 11, 2011

Social Security turns 76

August 14, 1935 The Social Security Act was signed into law as part of President Roosevelt’s New Deal. It was highly controversial as the country came out of the first Great Depression with parts of the New Deal being struck down by the Supreme Court. Roosevelt then changed the composition of the court in a bid to change their decision. (Sometimes we forget the ‘good old days’ of gentlemen politicians.)

The opposition was passionate, vociferous and ultimately not impactful. The New Deal fundamentally changed the U.S. and quite probably the world.  Legislation prior the New Deal kept the role of government limited. Roosevelt and the Democrats changed the role of government to provide services, funding and care for the elderly, sick and infirm. This rhetorical and philosophical difference in the size and scope of the state must be continuously debated. However, the reality is that Social Security is the #1 most popular government program in existence and it isn’t going anywhere.

Looking at the merit of the Act isn’t helpful, but looking at how the program is doing is. At 76, is Social Security showing its age? Politicians on the left and the right of the political spectrum have been hyperventilating that the program is broke and it is bankrupting the country. Per Gallup, 93% of Americans think that a crisis in Social Security is going to happen within 20 years. Not really.

Ida May Fuller - first Social Security Recipient
Those people who got the first checks in the late 1930’s never contributed to the program, but only took funds out. Over time that changed and workers and their employers would contribute to the fund and then draw benefits at the time of retirement. The idea was that the government had some costs to the early beneficiaries, but after that the program became self-sustaining. In fact, it’s called the Trust Fund. President Reagan popularized the term “lock box.” The great illusion is the idea that money withheld from paychecks are being set aside to be distributed via benefits upon retirement.

Per SSA, from 1937 to 2009 $13.8 trillion has been collected. $11.3 trillion has been paid out. Using grammar-school math, then, the Trust Fund has $2.5 trillion in excess cash. Problem solved?

Remember all that noise about the $14+ trillion deficit? $2.5 trillion of that is money that the government borrowed from the Trust Fund.

Think of it this way: you put away $20 a week towards a vacation. After a few years quite a nice sum would have  accumulated. Then the roof leaks and you have to borrow from the vacation fund to fix it. That’s sort of what’s happened – except the government didn’t raid the jar for a leaky roof, but rather to pay day-to-day expenses (groceries).

There is much discussion about how to “fix” Social Security. Various actuarial analyses show that in 2036 the program will be expending more money than it brings in.  This is because the number of beneficiaries in 25 years will outnumber the number of contributors. The surpluses from prior years will not earn enough interest to offset the difference, so either more contributions will be needed or benefits may need to be curbed. This inevitability is due to population changes. The program was conceived of with a fundamental expectation that there would always be more workers contributing than there would be workers retiring. It is this flawed assumption that must be corrected.

It is unfair to change the rules midstream. When people refer to the program as an entitlement – they’re right. People are entitled to the funds because they have paid into it and the quid-pro-quo was they’d get back certain benefits. Yes, there will be a problem in 25 years – let’s adjust for that generation and not punish this one that played by the rules.

  • Change the retirement age. When originally conceived, the Act was not intended to be a way of life. A relatively easy solution is to incrementally increase the retirement age so as not to pull the rug out from people in their 60’s, but so that those of us in our 40’s know we’re going to have to work into our 70’s. With the population change we’ll have to do so anyway --- there won’t be enough workers to replace those retiring.
  • Lift the caps. Have a percentage of every dollar earned be contributed. This is an additional burden on high income contributors, no question. This is much more attractive than means testing the benefits after somebody stops earning and immediately shores up the financial strength of the program that impacts 2% of the population.
  • Payroll tax should stay in place. President Obama and Congress have reduced the contribution rates as a way to stimulate the economy. It’s too small for people to notice in their paychecks. Spending hasn’t increased as hoped for. Companies are not using the savings to hire people. Starving the Trust Fund of needed dollars today is not a solution for tomorrow’s issues.

These three options would extend the life of the fund until after today's kids would need it. Social Security may not be this Libertarian's philosophical ideal way of taking care of people – but it also is not Government Spending gone awry. It should not be part of the general budget.  It’s an insurance plan. As long as it’s there let’s not mess with it. Using restricted dollars for discretionary spending has always been a bad idea. We’ve done that to the tune of $2.5 trillion so far. Washington should budget day-to-day expenses with day-to-day income.  The best birthday present:  Leave the Trust Fund secure!


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