Social Security Crisis

During its first fifty years, the Social Security system--sometimes referred to as the Old-Age Survivors and Disability Insurance (OASDI), was all things to all people. To the American public, it looked like a pension plan that yielded an excellent return on contributions. To advocates of income redistribution, the Social Security system provided a vehicle for substantially reducing poverty among the elderly without the stigma of "welfare."

For more than three decades the system's income routinely exceeded its outflow and its trust funds grew. This situation changed in the early 1970's when benefits were increased substantially, followed by higher inflation and leaner economic growth. However, as first recognized by the Social Security reforms of 1983, it is clear that, as presently implemented, the Social Security system cannot meet all its future obligations. Even if it does, future Social Security beneficiaries will not receive returns as favorable as their parents received.

One of the most divisive issues in modern American politics is the privatization of Social Security. President Bush has introduced legislation to Congress that requires citizens to dedicate a portion of their income, presently used to fund Social Security, to a private investment account. The Social Security debate is centered on the ability of the current system to continue to provide Social Security benefits to the next generation of elderly. Many argue that Social Security, as it exists today, will become unable to provide benefits to the next generation of working people.

This paper will review a brief history of Social Security, and then will examine arguments made by social scientists in favor of incorporating private accounts to the Social Security program. The purpose is to determine whether privatization is a valid alternative to the present Social Security program. It will also explore the long-term impact of the present Social Security system on the federal debt and gross domestic product (GDP).

Social Security is the Nation's largest retirement and disability program, providing cash benefits to 47 million retired and disabled workers and to their dependents and survivors. Today one out of six Americans receives Social Security. Only 49.7 percent of Social Security beneficiaries receive their own retirement check. Spousal, survivorship or disability benefits make up the rest that are received. This includes close to four million children. For the majority of Americans, over two-thirds of current and future retirees, Social Security will be the largest part of their income in retirement. The question we should be asking is not whether we can save Social Security, but whether we can provide the best possible retirement system for American workers.

In the United States, the Social Security plan began when President Franklin Roosevelt signed the Social Security Act in 1935 as a reaction to the growing number of elderly in poverty. It is important to keep in mind that Social Security was designed as only a basic retirement income program. As the title suggests, it was structured to provide security. To protect individuals from unforeseen catastrophes, the government spreads certain risks among all members of society so that no single family bears the full burden of such occurrences. Social Security provides insurance benefits to retired people, to families whose wage earner has died, and to workers unemployed due to sickness or accident. Unlike welfare, the social security benefits are paid to an individual, or his or her family, at least in part on the basis of that person's employment record and prior contributions to the system. The program is administered by the Social Security Administration (SSA) and since 1965 it has included health insurance (HI) benefits under the Medicare program.1, 2 (See figure 1 below).

Social Security is a pay-as-you-go system under which taxes collected from current workers are used to pay current retirees. For every dollar invested, 69 cents goes to a trust fund that pays monthly benefits to present retirees and their families and to about 8 million widows, widowers, and children of workers who have died. Nineteen cents goes to a trust fund that pays for the health care of all Medicare beneficiaries. Twelve cents goes to a trust fund that pays benefits to people with disabilities and their families. Another way of looking at the payroll tax for Social Security is out of the total 15.3% contribution, the worker contributes 6.2% to Social Security and 1.45% to health insurance, which is matched by their employers. The Social Security portion is levied on earnings up to $90,000 in 2005. The HI portion is levied on all earnings. There are also administrative costs that are paid from the trust funds described above and are only about one cent of every Social Security tax dollar collected.3 Every dollar collected in payroll taxes is spent immediately and there is no investment made in real assets.

The Social Security Trust Fund consists of IOU's the government has written to itself. These IOU's are special interest U.S. Treasury bonds, which the federal government can repay only through higher taxes, massive borrowing, or massive cuts in other federal programs. Currently these trust fund assets are worth over $1.5 trillion. The interest rate earned on these bonds is around 6% annually. While many workers thought the annual surpluses were being used to build up a reserve for baby boomers, the federal government has been spending this money to fund other government programs and to reduce the government debt. On the other hand, the American Association of Retired Persons (AARP) and many economists believe the trust fund is secure.4 They feel the only way Social Security will be in trouble is if Congress votes not to honor the U.S. government bonds held by Social Security. They are also of the opinion that the retiring baby boomers (people born between 1946 and 1964) are not as much of a problem as the fact that people are living longer. In developed and some developing countries around the world, low fertility rates, rising life expectancy, and early retirement have resulted in shrinking ratios of workers to retirees. In response to Social Security's gloomy financial future, there is growing bipartisan support for reform through partial or complete privatization of the system. Several countries already have private Social Security systems in place. We can learn valuable lessons and avoid serious mistakes by reviewing the systems currently used by these countries.

Today's Social Security faces two serious problems that will only get worse over time. First, the program has promised workers more in benefits than it can afford to pay. In about 12 years, Social Security