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Social Security

Social Security is funded on a “pay as you go” basis. Thus, workers are paying payroll taxes into the system (6.2% for Social Security plus a matching 6.2% paid by their employers) to cover benefits for current retirees.  It is understood that they will receive comparable benefits in their retirement years, but there is no mechanism for linking the taxes a worker has paid in to the benefits he or she will receive.

Until recently, taxes dedicated to Social Security substantially exceeded program outlays. This cushion was dissipated during the 2008-2009 recession, which resulted in higher joblessness and lower tax revenues.  In August 2009, the CBO reported that “Social Security’s annual spending will roughly equal its revenues over the next decade.”

Longer term, due to the declining ratio of active workers to retirees (currently 3:1, will fall below 2:1 as the “baby boomers” retire), a rapidly growing shortfall is projected between Social Security benefits and the taxes earmarked to pay for them.

Unless Social Security is fundamentally restructured, there are only three ways for the government to cover this shortfall – raise taxes, cut benefits, or borrow money.  Do not be fooled by claims that the Social Security Trust Fund will postpone the day of reckoning until the 2030s; the trust fund is simply a device to account for temporarily “excess” Social Security taxes that our government has spent for other purposes.

Even if the solvency issue could be resolved in some way, the current structure of Social Security would remain inequitable.  Long-lived beneficiaries may receive far more than they paid into the system, while others receive far less (or even nothing). There are also issues re spousal and survivor benefits, which only become available when couples get married and stay that way for at least 10 years. 

The best way to fix Social Security (make it equitable as well as solvent) is to give younger workers the option of using the Social Security payroll taxes they pay to fund personal retirement accounts in lieu of traditional retirement benefits.  There would be no effect on the benefits of retirees or workers nearing retirement. 

SAFE supports the Cato Institute’s plan for personal accounts.  See The 6.2 Percent Solution (Michael Tanner’s summary of this proposal), and the informative pamphlet “It’s Your Money” (contact us if you would like a copy).

The Bush Administration proposed a watered-down version of the Cato plan in 2005, which was fiercely resisted.  One of the most effective objections was the up front money (several trillion dollars over a period of years) that would have been required to fund the creation of personal accounts.  Although the outlays would have been fully recouped later, opponents of the plan labeled them a “cost.”

Despite our best efforts – SAFE contacted Delaware’s members of Congress, sent a memo on Social Security financing to all U.S. Senators SSF, and gave a talk at the Retired Men’s Luncheon Club  Newsletter - the president’s proposal fell short and was abandoned. 

Although a SAFE survey in September 2005 showed support for addressing the long-term funding problem of Social Security currently (Survey Says), this idea seems politically "dead"  for the time being. Recent discussions have focused on trimming benefits and/or enhancing funding for Social Security so as to defer the day when the government would be forced to make more drastic adjustments.

Blog entries

8/18/14 – An update on the Social Security shortfall

6/27/11 – Social Security belongs on the table with everything else

3/7/11 – Social Security is burnt out, now what?

8/16/10 Clamor builds for another Social Security fix

1/12/09 – Madoff writ large

4/14/08 – Getting action on Social Security

4/7/08 – Straight thinking about Social Security