Why social security matters

By: Mike Hubbard

Posted: 4/4/05

In 2041, about the time today's college students are eligible to collect Social Security, the system will run out of money. Thereafter, Social Security will only be able to pay out what it takes in and this means an estimated 27 percent reduction in its real value.

In 2004, Social Security tax revenue was $658 billion and the benefit expenses totaled $493 billion. The difference between the two is invested into government securities via the Social Security Trust Fund. In other words, the U.S. government spends excess Social Security payroll taxes and gives the Social Security Trust Fund Treasury Bonds in return. Starting in 2017, Social Security expenditures will exceed revenue and funds will need to be drawn from the Trust Fund. At that point, Social Security benefits will rely on the government paying its debt. If the government were to default (refuse to pay) its debt, Social Security would encounter shortfalls much sooner. If the government manages to not default, other federal taxes or a transferal of national debt (the Social Security-owned portion) to publicly held debt would pay for Social Security. The only difference between 2017 and 2041 is that until approximately 2041 the government will, on paper, owe money to the Trust Fund.

Complacent Congressmen, mainly Democrats, are willing to table the looming threat to Social Security for the next generation. If action is not taken, it will mean further increases in the payroll taxes (tax which funds Social Security) to fund the incompetent management of Social Security resources.

A simple solution to Social Security is Bush's semi-privatization plan. Under his plan, Social Security would remain the same for anyone born before 1950. However, those born after 1950 would have the opportunity of a personal account to utilize as supplemental income. These personal accounts are a step into turning Social Security into a forced savings plan. These accounts would be tangible assets retirees can spend or leave to their children. To increase stability the accounts can be diversified into a mix of stocks and bonds, which will have a higher rate of return than the current Trust Fund. The personal accounts should be diversified and invested conservatively. Otherwise, people will unwisely invest and lose their nest egg. According to Bush's plan, a person who earns an annual average of $35,000 would save approximately a quarter million by the time they retire.

In 1935, when Social Security was created, it was only 1 percent of an employee's income and the employer had to match it with an additional 1 percent. The current tax for Social Security is 6.2 percent and including the employer matching funds, it's 12.4 percent. In other words, the initial Social Security tax was only 16 percent of what it is today. This is due to an extension of Social Security benefits, increased lifespan and lower fertility rates. In 1950 there were 16 workers for every Social Security recipient, today there are 3.3 workers for each beneficiary and when Social Security goes bust there will be only two workers for each beneficiary. To compensate for changing demographics, payroll taxes have been repeatedly raised over the years and inevitably, if complacent Congressmen have their way, payroll tax raises will continue to be the makeshift "solution."

Payroll taxes fund Social Security and Medicare. The total payroll tax is 15.3 percent (12.4 percent to Social Security and 2.9 percent to Medicare) and the tax is split between employee and employer. The payroll tax is only on a base amount of an individual's income and this base amount is annually adjusted for inflation. In 2005, for example, the base amount is $90,000. Since all income over the base threshold is not taxed, payroll taxes are a regressive form of taxation. Regressive taxation is when the poor are taxed more than the rich. A possible solution to future Social Security shortfalls is removing the payroll tax cap and extending payroll taxes to all income. However, this is not a solution; it is merely a different way of raising taxes.

For one-third of Social Security recipients, the system accounts for over 90 percent income. Removing Social Security from the wealthy, who maintain a certain income level, is an option. Unfortunately, this would create a disincentive for elderly people to work. Essentially, it would be penalizing the elderly for working and the intangible costs of that need to be accounted for.

The United States has totalization agreements with 20 countries. Ordinarily, international workers are forced to pay the social security taxes of their nation of citizenship and work country, but totalization agreements simplify the taxation. These agreements enable workers whose careers were split between countries to proportionally receive social security benefits from each respective nation. Recently, the commissioner of Social Security signed a totalization agreement with Mexico. The Social Security administration predicts over the course of the next five years, U.S. companies and workers will save an estimated $140 million, but the Social Security administration will pay $550 million. Congress has passed a resolution condemning the agreement, because the net beneficiary of this agreement will undoubtedly be Mexico. In the resolution, Congress stated the totalization agreement "puts America's seniors at risk." Undoubtedly, the president and Congress will not approve the agreement.

In many respects, totalization agreements defeat the purpose of Social Security. Social Security was originally intended to protect American elderly and not people who at one time worked in America. Workers from countries with lower standards of living can drain the capital of the United States' Social Security system with the agreement.

Social Security is not modernized because of who votes. Reforming Social Security would most benefit 18 to 24-year-olds who also land among the lowest voter rates with 17.2 percent in 2002. Ironically, when younger voters do vote, statistically they are more apt to vote for left wing candidates who oppose Social Security reform. Additionally, 63.1 percent of 65 to 77-year-olds voted in 2002 and these voters are logically the most content with Social Security. Regrettably, until the crisis nears, nothing will be done. In any respect, it is regrettable that Social Security reform is not a priority for most American voters.

Sources

http://www.whitehouse.gov/infocus/social-security/

http://www.ssa.gov/OACT/TR/TR05/II_highlights.html#wp76460

http://www.ssa.gov/pressoffice/factsheets/USandMexico.htm

http://en.wikipedia.org/wiki/Social_Security_(United_States)

http://www.census.gov/