Social Security Crisis My Rearend

OK, let’s get back to business here. I know it’s been a while, but I’ve been busy. Reading. And reading. Most of you probably aren’t as obsessive as I am, but that’s good, right? You gain the benefit of my need to read by checking in here from time to time. So enough of the pleasantries, let’s get on to today’s big questions:

Is there a Social Security “crisis” as our fearless leader claims? Contrary to what approximately 45 % of the country believes, according to Time magazine, No.

Is there a problem with Social Security? Possibly, but not at the moment.

Do we need to take action immediately and change the Social Security system? No.

Do we need to create private savings accounts in order to “save” Social Security? No.

Will private savings accounts solve whatever “problem” there may be? No.

Should you be worried about Social Security? Sure, why not? I am, but not for the reasons you are probably thinking.

Should you do something about it? Yes. Contact your representatives in government and let them know how you feel.

There. Done. No need to read further, if you just want to take my word for it. But if you are interested in seeing me back up my conclusions, then read on.

So you know what Social Security is, right? For most of us and our parents, it’s the monthly check that comes once a month after we reach the government dictated “retirement” age. According to the New York Times, there are about 47 million people who receive a Social Security check each month. Everyone who works…on the books…has money deducted from their paycheck every week. Most of this money goes to pay benefits that are currently due to people who are entitled to receive Social Security benefits. That’s how the system works. It’s a “pay as you go” system. Currently, there is more money coming into the system than is paid out every month to beneficiaries. The excess money is used to buy US Treasury securities. Bonds. These bonds are part of the “trust fund” that was such a big part of the discussion during the 2000 presidential campaign. These bonds are essentially just IOUs from the federal government. The money is actually spent by the government for current expenses, like Medicare, the Iraq war, tax breaks for the rich. But I digress.

There is no current crisis with Social Security. I can’t say that loud enough. If nothing at all is done, there is enough money coming into the system every month to pay Social Security benefits for the next 13 years, according to most estimates. The prediction is that the Baby Boomers will start retiring en masse around 2018, at which point it is also estimated that there won’t be enough money coming into the system to pay the benefits that will become due. Oh lawdy, so there is a problem coming up soon! Um…no.

After the Baby Boomers retire, and at the point where there’s more money scheduled to be paid out than there is coming in, we’ll just need to start cashing in some of those Treasury bonds. The Social Security Administration itself estimates that there are enough of these bonds to keep the system solvent until 2042, a full 37 years from now. The Congressional Budget Office puts that date at 2052. Doesn’t sound like a current crisis to me. After that, there will only be enough money to pay about 70% of benefits, according to estimates. Conservative estimates. More optimistic projections indicate that Social Security, if left untouched, would be able to pay full benefits for all for at least the next 75 years.

Dubya and his cohorts in Congress think that private savings accounts will solve the problem. But they won’t, at least not by themselves. Remember that I said the money that comes in pretty much goes right out to pay benefits? If you are allowed to divert part of your Social Security taxes into a private account, there won’t be enough money coming in to pay current benefits, so the government will have to borrow money to make up the difference. And, according to Federal Reserve Chairman Alan Greenspan, extra borrowing could raise interest rates, and that could put a crimp on the economy. In addition, by all estimates, Social Security benefits that younger workers will receive when they retire many years from now will still have to be reduced.

Republicans hate to increase taxes. In fact, there are a number of Republicans in Congress that have actually pledged never to raise taxes. Really. See “BREAKING THE CODE” from the NY TIMES, January 16, 2005. One of the solutions put out, mostly by Democrats in Congress (who, truth be told, don’t have as many qualms about raising taxes) is to raise Social Security taxes about 2%. Another solution is to make Social Security taxes more progressive. At the moment, we all pay Social Security taxes on the first $90,000 of our income. This number is adjusted over time to keep pace with increases in wages. Kind of odd, in my opinion, that the tax cuts off at a certain income level because income taxes don’t cut off at any point. So increasing the amount of income subject to Social Security taxes is another proposal. I kind of like this one. And, apparently, so does at least one Republican Senator, Lindsey Graham, of South Carolina, who, according to Time magazine, proposes raising the income cut-off to $200,000. Way to go, Lindsey.

Now, lest you think I’m just a bleeding heart liberal, I don’t have any hard and fast objection to personal savings accounts. Apparently other countries are doing it. And, if it can be done better than Social Security does it, cool. But Social Security is incredibly efficient in terms of the expense of running the system. With private accounts, money will be handled by private parties, like Vanguard and Fidelity (just examples, these are not companies named in any plans), that charge management fees. And, if the Bush Medicare drug plan is any indication (the government can’t negotiate for a lower price with pharmaceutical companies), any changes that are passed by this Congress are likely to favor businesses, so who knows what kind of fees these firms would charge. One estimate that I have read indicated that a management fee of 1% of assets would reduce money in the affected accounts by 20% over time.

According to Business Week (January 24, 2005 issue), Wall Street doesn’t have a lot of interest at the moment, because there is concern that, if private accounts come to pass, the options for individuals will be limited to index funds and other low margin accounts. But the choices are likely to increase over time, so Wall Street will be all in, believe me. Again, according to Business Week, if funds charged just 0.8% of assets, Wall Street could rake in $940 billion in investment fees over 75 years. Holy crap!

I think what it comes down to is this. Republicans hate big government. Social Security is a big government program. Hence they want to get rid of it. Even if it works. A 70-year-old program created by a Democrat that has been successful and will be successful for at least another 37 years by conservative estimates? According to the New York Times, for about 2/3 of the elderly, Social Security supplies the majority of day-to-day income, and for the poorest 20%, about 7 million, it’s all they’ve got. Yeah, it makes total sense to phase it out.

We already have risk in our 401(k)s. Social Security is that stable portion of retirement planning that used to be provided by corporate pensions. Let’s not risk the security of many millions of people.

For what I think is a pretty good article (sorry, it’s the economics geek in me), by economist Paul Krugman, op-ed contributor to the NY Times and a professor of economics at Princeton, check out The Economists Voice at www.bepress.com/ev.