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The Fight Over Social Security Reform

February 4, 2011 1 comment

If you’re tuned into the political scene, you know the fight for Social Security is heating up.  Irrespective of your political allegiances or persuasion, this is a battle that you should pay attention to. 

Social Security and Medicare currently cost approximately $1.5 trillion annually, which was 43% of all federal spending in 2010.  The Congressional Budget Office has predicted that the Social Security will pay $130 billion more in benefits in the coming year, than it receives in Social Security taxes.  The 2% reduction in employee Social Security taxes for 2011, which was part of the tax compromise between President Obama and the Republicans, caused the shortfall to increase substantially.

Recently, a couple of influential House Republicans floated the idea of raising the retirement age again, allowing younger taxpayers to invest a portion of their Social Security dollars in private investments, and issuing vouchers for seniors to purchase medical coverage.  Not surprisingly, these proposals sparked an impassioned response from the more ardent advocates of the current system.  Sen. Charles Schumer claimed, ““They want to privatize Social Security. Privatize equals end — no more.”  Such bold statements may be expected as some political strategists have suggested that Social Security is an issue favorable to Democrats, and one that they should try to use to regain some of the political clout they lost in the 2010 mid-term elections.  

If you read through some of my prior posts, you’ll discover that I believe the current system is broke and needs to be reformed.  I may not agree with any or all of these ideas, but I give the proponents credit for taking on this politically-charged issue and considering ideas for reform.  It may not be popular to talk about Social Security reform, but it needs to be done.

Exaggeration and misleading information is part of the fabric of modern American politics, but we need to get beyond it.  Social Security touches the lives of virtually every American.  Accordingly, we need to debate the issues and work towards a solution and not get bogged down in the typical Washington political spin cycle.

The Social Security Trust Fund is one area of this debate where few politicians are willing to be truthful with the American people.  As I pointed out in a prior article, the Social Security Trust Fund doesn’t exist.  Despite what you hear about trillions of dollars in this so-called trust fund or lockbox, it’s not real money.  It’s nothing more than paper IOU’s from the government to itself. 

Personally, I believe many politicians are too afraid to tell the truth, especially the ones who have been in Washington for years.  I think the American people would be outraged if they fully understood how Congress has spent so much money and put our nation on a path that is not fiscally sustainable.  Thus, it’s far easier for politicians to perpetuate the lie that this huge pile of money exists, rather than admit the truth.

The fight for the future of Social Security is just beginning.  I welcome you to join the discussion and debate, whether on this forum, or somewhere else.  I’m all for vigorous debate of the ideas and issues surrounding Social Security.  I’m less concerned about pontificating my ideas than trying to communicate the facts and truth, so you have the information necessary to make well-informed decisions on this issue.  This is why I keep harping on the non-existent Social Security Trust Fund.  Congress can’t make good decisions based upon a faulty premise that they have $2.5 trillion of money which doesn’t really exist.  I hope you’ll join the discussion.

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Saving Social Security

Because Social Security impacts the lives of so many people, reforming the Social Security system is probably going to be one of the greatest fiscal and political challenges facing this generation. 

Nearly one-sixth of the population is receiving benefits, and this percentage will grow as the Baby Boomers move into retirement.   The increasing number of beneficiaries will also make it harder for the government to pay the promised benefits.  Social Security and Medicare already consume over one-third of the federal budget, and cost over $1 trillion each year.  The cost will only increase, and despite what politicians say, there is no Social Security Trust Fund to draw upon.  It’s only a bunch of paper IOU’s from the government to itself.  The excess Social Security taxes have been spent on other programs.

Unless some significant reforms are made, I predict a crisis will occur in the next decade.  Here are a few examples of modifications that will help sustain Social Security.

  • The retirement age should be adjusted every decade.  As the average life expectancy goes up or down, so should the age for receiving benefits.
  • Benefits should be adjusted based upon financial need, especially for disability and survivor benefits.
  • Increase taxes, but only after other benefit reductions have been enacted.  In the 75-year history of Social Security, benefits have not been curtailed, but the tax rate has nearly quadrupled.

I don’t see any way that current beneficiaries can be paid if money is taken out of the system, so complete privatization is off the table.  However, there needs to be a lot more transparency of the amount of taxes you pay on an annual basis, and the calculation of your projected benefits.  If Social Security must benefit everyone paying into the system, then let’s treat it more like a private pension plan. 

Having squandered nearly $2 trillion of excess Social Security taxes that was intended to pay benefits to the Baby Boomers, politicians and the Social Security administrators need to be held more accountable for their management of our money.  Social Security is not a 401(k), but more information can be provided than simply showing how much you have earned each year and the estimate of your future benefits.

Ideally, I think Social Security benefits should transition back to a program that is primarily a benefit for people who have little retirement assets or other income to support themselves.  Stop treating it like a private pension plan, where you pay a lot of money into the system, and expect to receive it back with a rate of return.   There will need to be a grandfathering for those who are currently receiving benefits and those close to retirement, but over time, the benefit structure can change.

Allow Social Security to be part of the safety net for those who are vulnerable and in need.  The benefits may not be great, but that’s okay.  It’s not intended to give you a lavish or comfortable lifestyle.  The purpose is to provide basic sustenance so that you can still live independently.  The cost of such a program should decrease dramatically, which should also reduce the tax burden and free up more money for you and I.  Therefore, the reduction in benefits should also be coupled with greater incentives for people to put more money into their own retirement plans.

 In the past few articles, I have made my case for why Social Security is in trouble, and offered some ideas of how to reform the system.  I hope that I’m wrong and the system won’t face a major crisis within the next few years, but from what I know I don’t see how that’s possible. 

I doubt you have agreed with all of my analysis, opinions and ideas.  Good.  My intention was to provoke your thinking and encourage a discussion.  The problem is enormous and no one has all the answers, especially not me, but I do believe that by working with all different types of people, we can avert a crisis and keep Social Security sound for many years to come.

The Politics of Social Security Reform

The current political discourse is probably one of the greatest barriers to reforming the Social Security system.  As I have tried to explain in the past several posts, Social Security is on the verge of an epic crisis, which will not be easily resolved. 

At present, there are more than 50 million Americans receiving Social Security benefits, which is approximately one-sixth of the U.S. population.  The U.S. government will spend a whopping $1.15 trillion on Social Security and Medicare in 2010, which is 32.5% of all federal spending.  These factors alone illustrate the importance of Social Security in our society.

Since it impacts the lives of so many Americans, the same old tired political clichés need to be abandoned.  Someone who believes Social Security is bankrupt and in need of reform is not necessarily a cold, heartless person looking to steal money from the elderly and see them live out their final days impoverished and alone.  At the same time, a person who believes in maintaining Social Security as a safety net for other people is not automatically a socialist or reckless spender. 

I believe the first thing that needs to happen is for politicians (of all political parties and persuasions) to come clean about the current status and future of Social Security.  Politicians who continue to maintain that we have nothing to worry about for the next 30-40 years are disingenuous at best, and dishonest at worst.  I don’t know if they are more afraid of the panic that might erupt if people knew the truth, or if they are afraid they will lose their power and position.  We may not like the current situation and future prospects, but continuing to pretend like there isn’t a problem is only going to make it worse.  The longer we wait, the fewer options we have, and the more painful the process is going to be.

It may sound rather egalitarian, but it’s time to respect our differences and come together to work towards a solution.  We need to set aside the labels of liberal vs. conservative; Democrat vs. Independent vs. Republican; socialist vs. capitalist, etc.  Everyone has something to bring to the table of ideas. 

For the conservative, reform is not about entitlements, welfare or socialism.  Your advocacy of individual freedom, personal responsibility and fiscal restraint is commendable.  At the same time, there are real people, with real situations, who need help.  Retain your conservative principles, yet show compassion for those who are hurting, destitute or in need, even if it is a result of their poor decisions.

For the liberal, change is not about greed or simply saving money.  Your consideration for people is admirable, but at the same time there are limits to what can and should be done.  Just like your personal finances, there is only so much money to go around, and you can’t spend what you don’t have. Maintain your compassion for those in need but recognize the realities and fiscal limitation of what can be provided.

Reforming Social Security won’t be easy, but it will be near impossible unless the political discourse is transformed.  If nothing changes, then little will be done.  If I’m correct, a crisis will erupt within the next decade, and we will be forced to address the issue.  Unfortunately, opportunities and alternatives will be lost because politicians refused to modify their approach to reforming Social Security.  It doesn’t have to be this way, and hopefully our leaders will rise to the occasion, or we’ll elect those who will.

Social Security Reform: Changing Perceptions

At present, there is a dichotomy in the perceptions and expectations of the Social Security system.  They are:

  • Social Security is a progressive/socialistic system of wealth redistribution – it takes money from one class of people (the workers) and gives it to another (the retirees).
  • Social Security is an individual pension plan – each person who pays into the system is entitled to a guaranteed benefit in return.

Wealth redistribution is contradictory to individual ownership.  The conflict between these perceptions will not be easily reconciled and will need to be confronted before serious reform will take place

A fundamental purpose of Social Security is to make sure that everyone has a basic level of survivor, disability or retirement benefits.  The need for these benefits is based on the presumption that the person does not have the wherewithal to provide for themselves, thus the government must step in to assist.  Whether or not you like the moniker, it is a socialistic concept.  In contrast, pure capitalism allows each person to fend for themself, irrespective of the consequences.

The Social Security Administration has also created an expectation that you will receive future benefits in return for the taxes currently paid in.  Each year you get an earnings history and a projection of your future benefits.  This is very analogous to a defined benefit pension plan, in which you are guaranteed a lifetime benefit based on your age and earnings history.  Armed with this information, is it any wonder people have a perception and expectation that they are entitled to a certain benefit and any potential reduction is seen as taking something that belongs to them?

I believe that politicians have been quite happy with this contradiction.  On the one hand, they argue that Social Security is a vital social program that must be funded.  On the other, the promise of a future benefit is justification for collecting taxes presently to fund their current spending (and overspending) habits.  Politicians have positioned Social Security to be a social program and an individual pension plan at the same time.

Lest you misread what I haven’t written, I believe Social Security does provide an important social purpose.  I may not agree with how benefits are calculated and administered, but taking care of the most vulnerable in our society is a good thing.

However, the promise and expectation of future benefits has allowed politicians throughout the decades to raise Social Security taxes and redirect the surpluses into other government programs.  A pension administrator would be guilty of breaching their fiduciary duty (maybe even fraud) if they managed your private pension assets the way the government has mismanaged Social Security.  Of course the politicians revert back to the argument that it’s a government social program, not an individual retirement account to justify their reallocation of Social Security taxes.

In the end, the politicians love the dichotomy, because they can triangulate between the two arguments to serve their immediate purpose.

True reform to Social Security should include a resolution of the conflicting principles and perceptions.  Either it’s a social program designed to provide basic retirement benefits for those who are most in need, and you have no entitlement to receive back any of the taxes you have paid.  Or, it’s a government sponsored pension plan whereby the administrators need to be held accountable for how the money is collected, disbursed and managed.

It can effectively be one or the other, but history has proven it can’t be both.  Let the debate begin and allow the American people decide what they want… after all… we are footing the bill.

Social Security Reform: Privatization

Of all the issues concerning the potential reforms of Social Security, nothing is as controversial as the topic of privatization.  The mere mention of it will likely spark a fierce debate from people of all walks of life and political persuasions. 

The history and issues of privatization are much more extensive than can be covered in this short post.  If you want an in-depth discussion of the issues, read this Wikipedia article.  For a quick synopsis, check out this side-by-side comparison on procon.org

President Bush made a push for privatization in his 2005 and 2006 State of the Union addresses, but Congress showed little interest in tackling this issue.  Given that President Obama is strongly opposed to this concept, there has been little discussion of the matter in the past 18 months.  The debate over the future of Social Security will continue, and as the pressure for reform mounts, expect privatization to be part of the discussion, even if it doesn’t become part of the solution.

It may be a good thing that a portion of everyone’s retirement benefits remain fixed and secure.  As most retirement and pension accounts have been battered over the past couple of years, the lure of placing more money in the stock market has lost some of its luster.  However, when you consider that the projected rate of return for people born after 1965 is less than 2%, you can understand why people want a greater level of control and rate of return.  Many Gen X’ers and Millennials doubt they will ever get back what they paid into the system, let alone receive a rate of return.

One of the greatest barriers to privatization is dealing with the short-term deficits that would occur in trying to pay current Social Security recipients.  When Social Security is referred to as a huge Ponzi scheme, advocates quickly point out that Social Security is a pay-as-you-go system.  Since current tax collections are paying present benefits, there would be a huge deficit if taxes were re-directed into private accounts and invested outside of Social Security.  Given the number of Baby Boomers set to retire in the next 10-20 years, I doubt the government could raise the revenue necessary to meet this obligation without retaining current Social Security taxes.

A primary purpose for enacting Social Security in the 1930’s was to help provide a basic retirement benefit for elderly people who were suffering through the Great Depression.  They either had no pension plan or were wiped out when the stock market crashed.  Allowing for complete privatization with self-directed accounts would be an abandonment of the original purpose of Social Security and risk having another group of retirees with no money.

You may feel like you are a savvy enough investor to take on such a risk, but the failures of the past 2-3 years should prove that anyone is at risk.  Many unsophisticated financial consumers got burned with subprime and option ARM mortgages.  At the same time, veteran Wall Street traders lost big too, which proves that everyone is susceptible to massive investment losses.

Unlike the other three reform options (raising the retirement age, reducing benefits and raising taxes), I’m not going to proffer an opinion on privatization… at least not yet.  I want to discuss reforms to the perceptions and politics first.  After that, I’ll tell you what I think about privatization.