Assumptions are not facts

Social Security Reform

 

Assumptions are not facts. They’re guesses. Sometimes right on, other times way off and sometimes somewhere in between.  But, when it comes to Social Security, regardless of the accuracy of the assumptions used in the various forecasts, the reality is that the system is going broke. The question is not “if” but “when.”

 

Pay-As-You-Go

 

Start with the fact that the Social Security Administration does not have any funds in trust or investment accounts, such as stocks, bonds and savings accounts. The entire system is actually a giant Ponzi-type pay-as-you-go scheme that takes the payroll taxes of those who are still working and distributes it to retirees. Individuals who hustle similar dishonest “investments” are sent directly to jail without passing “Go,” but it’s OK for Congress.

 

A Government Shell Game

 

According to “Retiring With Dignity: Social Security vs. Private Markets, William G. Shipman, The CATO Project, Aug. 14, 1995.

 

“Any surplus is not saved or invested for pensioners. Those funds are borrowed by the federal government to pay current operating expenses and replaced with government bonds…the federal government lends itself the excess in return for an interest-paying bond, an IOU that it issues to itself…The funds are not invested for the benefit of present or future retirees.”

 

What a brilliant idea, having the government borrow money from itself and issue IOUs to itself, promising to pay it back later. But wait, doesn’t the money all come from the same pocket: the taxpayers, right? If you’re confused by this, don’t fret, you’re not alone. The entire setup is nothing more than a giant shell game— now you see the money, now you don’t, which shell is it under? 

 

Our Social Security program has worked to this point because money has been coming in faster than it has been going out. But that’s about to end.

 

Charles Krauthammer, writing in the Washington Post (in 2005), said that in 2018 the “pay-as-you-go system starts paying out more (in Social Security benefits) than goes in (in payroll taxes)…But because the population is aging, in 13 years [now 11 years in] the system begins to go into the red.”

 

At that point, Social Security will only be able to pay 73 percent of promised benefits to retirees.

 

Key Statistics

 

If you’re not yet convinced that Social Security is going bust, here are some stats from “Retiring With Dignity: Social Security vs. Private Markets, William G. Shipman, Aug. 14, 1995”, The CATO Project, worth considering:

 

  • In 1935, when the Social Security Act was adopted, life expectancy at birth was 64 years; in 1995 it was 75; today it’s over 77. 
  • The birth rate was 3.56 in 1950, 2.0 in 1995 and is currently something less than 2.0.
  • There were 16 workers for every Social Security recipient in 1950; 3.3 in 1995, and the ratio has been projected to be less than 2.0 in 2030.
  • In 1937, the maximum Social Security Tax was $60 on $3,000 of income. Today, it’s $6,045 on $97,500 of income, a 10,000 percent increase.
  • (NOTE: Remember, the employer matches the employee’s contribution).

 

These numbers clearly demonstrate why Social Security is going under, people are living (read collecting benefits) longer, and there are fewer workers paying into the system to support each retiree. In about 20 years, less than two workers are expected to be paying into the system to support each beneficiary, compared to 16 in 1950. 

 

It doesn’t take a math major or a Ph.D. to recognize that this is not feasible.

 

Furthermore, Social Security was not really intended to be a retirement program. Politicians, who devised the program in 1935, including FDR, knew perfectly well at the time that most Americans wouldn’t live long enough to collect any benefits. 

 

The United States is not alone in being confronted with the dilemma of a failing national pension system. It’s a universal problem, affecting all the European nations and Russia, among others.

 

Possible Solutions

 

One solution might be to drastically reduce benefits for all social security beneficiaries. How much no one knows, but it could easily be a third or more.

 

Another alternative is to increase the retirement age, which will slow the rate of outgo, although that will ultimately not be enough of a fix. Raising the age of eligibility to 67 is already being phased in.

 

A third possibility is to raise taxes, dramatically, hardly an attractive option.  

 

Or, the government could borrow the money to cover the shortfall, which currently adds up to something in excess of $9 trillion, an astounding unfunded liability that’s almost equal to the total national debt.

 

Of course, the problem could be fixed by reducing other government spending. However, since the discretionary portion of the federal budget is relatively small, it would mean significant cuts in other expenditures, such as defense, education, highways, energy, welfare or the host of so-called “entitlement” programs, not very likely.

 

Private Social Security Accounts

 

The best answer is to wean the Social Security system off the government dole by allowing people to set aside at least some portion of their payroll taxes in personal investment accounts for their own retirement. This has been done with considerable success in Chile, where the CATO Institute reported in the article “Economist Estelle James Examines Chile’s Pension System,” Feb. 25, 2005, that during the first 22 years, the rate of return “was an astonishing 10 percent above inflation.”

 

Private Accounts Have Two Big Advantages:

 

Individual accounts will belong to the people whose earnings are taxed to make contributions for their own retirement. Thus, any money remaining in their personal retirement accounts can be passed on to their heirs, instead of reverting to the government when they die.  It’s a choice between creating and or increasing workers’ personal estates versus a dead loss.

 

The rate of return on investment in individual Social Security accounts will be much greater than the one to two percent average annual yield that’s currently being realized, which will translate into higher retirement income for participants.

 

A 2001 report by the CATO Institute, titled, “America’s Social Security System: The Case for Privatizing,” noted: “A poll…showed that 69 percent of Americans favored switching from the pay-as-you-go system to a fully funded, individually capitalized system. Only 11 percent said they opposed the idea.”

 

Interestingly, the major reason people cited for wanting to switch to a private system was not the higher rate of return they surely would capture under such a system…but they pointed rather to the fact that they, and not the government, would be in control of their retirement income.

 

According to the CATO Institute, “Generation Xers in America, by a margin of two-to-one…think they are more likely to encounter an UFO in their lifetime than they are to ever receive a single Social Security check. Even more remarkable, perhaps, was a poll taken….by White House pollster Mark Penn for the Democratic Leadership Council...found that 73 percent of Democrats favor being allowed to invest some or all their payroll tax in private accounts.”

 

Watching the endless analysis and debate about the need for reforming our Social Security system and how it should be done is, as they say, a little like watching sausage being made. Not a very pleasant or appetizing sight. What’s most amazing to me is how politicians continue to mislead the public on this issue and get away with it.

 

© 2007 Harris R. Sherline, All Rights Reserved