Social Security debate (United States)
Encyclopedia
This article concerns proposals to change the Social Security system in the United States. Social Security
is a social insurance
program officially called "Old-Age, Survivors, and Disability Insurance" (OASDI), in reference to its three components. It is primarily funded through a dedicated payroll tax
. During 2009, total benefits of $686 billion were paid out versus income (taxes and interest) of $807 billion, a $121 billion annual surplus. An estimated 156 million people paid into the program and 53 million received benefits, roughly 2.94 workers per beneficiary.
Reform proposals continue to circulate with some urgency, due to a long-term funding challenge faced by the program. Starting in 2015 and continuing thereafter, program expenses are expected to exceed cash revenues. This is due to the aging of the baby-boom generation (resulting in a lower ratio of paying workers to retirees), expected continuing low birth rate
(compared to the baby-boom period), and increasing life expectancy
. Further, the government has borrowed and spent the accumulated surplus funds, called the Social Security Trust Fund
.
During 2011 the Trust Fund held $2.6 trillion, up from $2.5 trillion in 2010. The Trust Fund consists of the savings of worker contributions and associated interest, to be used towards future benefit payments. Funds are held in United States Treasury bonds and U.S. securities backed "by the full faith and credit of the government". The funds borrowed from worker contributions are part of the total national debt of $14.3 trillion as of March 2011. By 2015, the government is expected to have borrowed nearly $3.25 trillion from the Social Security Trust Fund.
Between 2015 and 2037, Social Security has the legal authority to draw amounts from other government tax sources besides the payroll tax, to fully fund the program. However, this will liquidate the Trust Fund during that period. By 2037, the Trust Fund is expected to be officially exhausted, meaning that only the ongoing payroll tax collections thereafter will be available to fund the program. There are certain key implications to understand under current law, if no reforms are implemented:
Former President George W. Bush
called for a transition to a combination of a government-funded program and personal accounts ("individual accounts" or "private accounts") through partial privatization
of the system. President Barack Obama "strongly opposes" privatization or raising the retirement age, but supports raising the cap on the payroll tax ($106,800 in 2009) to help fund the program.
Federal Reserve Chairman Ben Bernanke
said on October 4, 2006: "Reform of our unsustainable entitlement programs should be a priority." He added, "the imperative to undertake reform earlier rather than later is great." The tax increases or benefit cuts required to maintain the system as it exists under current law are significantly higher the longer such changes are delayed. For example, raising the payroll tax rate to 14.4% during 2009 (from the current 12.4%) or cutting benefits by 13.3% would address the program's budgetary concerns indefinitely; these amounts increase to around 16% and 24% if no changes are made until 2037.
Social Security
is funded through the Federal Insurance Contributions Act tax
(FICA), a payroll tax. Employers and employees are responsible for making equal FICA contributions. During 2009, Social Security taxes were levied on the first $106,800 of income for employment; amounts earned above that are not taxed. Covered workers are eligible for retirement
and disability
benefits. If a covered worker dies, his or her spouse and children may receive survivors' benefits. Social Security accounts are not the property of their beneficiary and are used solely to determine benefit levels. Social Security funds are not invested on behalf beneficiaries. Instead, current receipts are used to pay current benefits (the system known as "pay-as-you-go
"), as is typical of some insurance and defined-benefit plans.
In each year since 1983, tax receipts and interest income have exceeded benefit payments and other expenditures, most recently (in 2009) by more than $120 billion. However, this annual "surplus" is expected to change to a deficit around 2015, when payments begin to exceed receipts and interest thereafter. The fiscal pressures are due to demographic
trends, where the number of workers paying into the program continues declining relative to those receiving benefits. The number of workers paying into the program was 5.1 per retiree in 1960; this declined to 3.3 in 2007 and is projected to decline to 2.1 by 2035. Further, life expectancy continues to increase, meaning retirees collect benefits longer. Federal Reserve Chairman Bernanke has indicated that the aging of the population is a long-term trend, rather than a proverbial "pig moving through the python."
The accumulated surpluses are invested in special non-marketable Treasury securities
(treasuries) issued by the U.S. government, which are deposited in the Social Security Trust Fund
. At the end of 2009, the Trust Fund stood at $2.5 trillion. The $2.5 trillion amount owed by the federal government to the Social Security Trust Fund is also a component of the U.S. National Debt, which stood at $13.3 trillion as of August 2009. By 2019, the government is expected to have borrowed nearly $3.8 trillion against the Social Security Trust Fund.
The CBO
projected in 2010 that an increase in payroll taxes ranging from 1.6%-2.1% of the payroll tax base, equivalent to 0.6%-0.8% of GDP, would be necessary to put the Social Security program in fiscal balance for the next 75 years. In other words, raising the payroll tax rate to about 14.4% during 2009 (from the current 12.4%) or cutting benefits by 13.3% would address the program's budgetary concerns indefinitely; these amounts increase to around 16% and 24% if no changes are made until 2037. The value of unfunded obligations under Social Security during FY 2009 was approximately $5.4 trillion. In other words, this amount would have to be set aside today such that the principal and interest would cover the shortfall over the next 75 years. Projections of Social Security's solvency are sensitive to assumptions about rates of economic growth and demographic changes.
Because Social Security receipts currently exceed payments, the program also reduces the size of the annual federal budget deficit. For example, the budget deficit would have been $182 billion higher in 2007 (i.e., $344 billion rather than $162 billion published) if Social Security were accounted for separately from the overall budget.
Increasing unemployment due to the subprime mortgage crisis
of 2008-2010 has significantly reduced the amount of payroll tax income that funds Social Security. Further, the crisis also caused more to apply for both retirement and disability benefits than expected. During 2009, payroll taxes and taxation of benefits resulted in cash revenues of $689.2 billion, while payments totaled $685.8 billion, resulting in a cash surplus (excluding interest) of $3.4 billion. Interest of $118.3 billion meant that the Social Security Trust Fund overall increased by $121.7 billion (i.e., the cash surplus plus interest). The 2009 cash surplus of $3.4 billion was a significant reduction from the $63.9 billion cash surplus of 2008.
The Center on Budget and Policy Priorities
wrote in 2010: "The 75-year Social Security shortfall is about the same size as the cost, over that period, of extending the 2001 and 2003 tax cuts for the richest 2 percent of Americans (those with incomes above $250,000 a year). Members of Congress cannot simultaneously claim that the tax cuts for people at the top are affordable while the Social Security shortfall constitutes a dire fiscal threat."
Projections were made by the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (OASDI) in their 71st annual report dated May 13, 2011. Expenses exceeded tax receipts in 2010. The trust fund is projected to continue to grow for several years thereafter because of interest income from loans made to the US Treasury
.
However, the funds from loans made have been spent along with other revenues in the general funds in satisfying annual budgets. At some point, however, absent any change in the law, the Social Security Administration will finance payment of benefits through the net redemption of the assets in the trust fund. Because those assets consist solely of U.S. government securities, their redemption will represent a call on the federal government's general fund, which for decades has been borrowing the Trust Fund's surplus and applying it to its expenses to partially satisfy budget deficits. To finance such a projected call on the general fund, some combination of increasing taxes, cutting other government spending or programs, selling government assets, or borrowing would be required.
The balances in the trust fund are projected to be depleted either by 2036 (OASDI Trustees' 2011 projection), or by 2038 (Congressional Budget Office's extended-baseline scenario) assuming proper and continuous repayment of the outstanding treasury notes. At that point, under current law, the system's benefits would have to be paid from the FICA tax alone. Revenues from FICA are projected at that point to be continue to cover about 77% of projected Social Security benefits if no change is made to the current tax and benefit schedules.
Retirees and others who receive Social Security benefits have become an important bloc of voters in the United States. Indeed, Social Security has been called "the third rail
of American politics" — meaning that any politician sparking fears about cuts in benefits by touching the program endangers his or her political career. The New York Times
wrote in January 2009 that Social Security and Medicare
"have proved almost sacrosanct in political terms, even as they threaten to grow so large as to be unsustainable in the long run."
that Congress had this authority.
are the most frequently cited examples of privatized systems. The experiences of these countries are being debated as part of the current Social Security controversy.
In the United States in the late 1990s, privatization found advocates who complained that U.S. workers, paying compulsory payroll taxes into Social Security, were missing out on the high rates of return of the U.S. stock market
(the Dow
averaged 5.3% compounded annually for the 20th century). They likened their proposed "Private Retirement Accounts" (PRAs) to the popular Individual Retirement Account
s (IRAs) and 401(k) savings plans. But in the meantime, several conservative and libertarian organizations that considered it a crucial issue, such as the Heritage Foundation
and Cato Institute
, continued to lobby for some form of Social Security privatization.
A liberal
think tank, The Center for Economic and Policy Research, says that "Social Security is more financially sound today than it has been throughout most of its 69-year history" and that Bush's statement should have no credibility.
Nobel Laureate economist Paul Krugman
, deriding what he called "the hype about a Social Security crisis", wrote:
The claims of the probability of future difficulty with the current Social Security system are largely based on the annual analysis made of the system and its prospects and reported by the governors of the Social Security system. While such analysis can never be 100% accurate, it can at least be made using different probable future scenarios and be based on rational assumptions and reach rational conclusions, with the conclusions being no better (in terms of predicting the future) than the assumptions on which the predictions are based. With these predictions in hand, it is possible to make at least some prediction of what the future retirement security of Americans who will rely on Social Security might be. It is worth noting that James Roosevelt, former associate commissioner for Retirement Policy for the Social Security Administration, claims that the "crisis" is more a myth than a fact.
Proponents of the current system argue if and when the trust fund runs out, there will still be the choice of raising taxes or cutting benefits, or both. Advocates of the current system say that the projected deficits in Social Security are identical to the "prescription drug benefit" enacted in 2002. They say that demographic and revenue projections might turn out to be too pessimistic — and that the current health of the economy exceeds the assumptions used by the Social Security Administration.
These Social Security proponents argue that the correct plan is to fix Medicare
, which is the largest underfunded entitlement, repeal the 2001–2004 tax cuts, and balance the budget. They believe a growth trendline will emerge from these steps, and the government can alter the Social Security mix of taxes, benefits, benefit adjustments and retirement age to avoid future deficits. The age at which one begins to receive Social Security benefits has been raised several times since the program's inception.
who specializes in aging issues, formerly served as a chairman of a national panel on Social Security's financial status; he has said that future options for Social Security are clear: "You either raise taxes or you cut benefits. There are lots of ways to do both."
David Koitz, a 30-year veteran of the Congressional Research Service
, echoed these remarks in his 2001 book Seeking Middle Ground on Social Security Reform: "The real choices for resolving the system's problems...require current lawmakers to raise revenue or cut spending--to change the law now to explicitly raise future taxes or constrain future benefits." He discusses the 1983 Social Security amendments that followed the Greenspan Commission's recommendations. It was the Commission's recommendations that provided political cover for both political parties to act. The changes approved by President Reagan in 1983 were phased in over time and included raising the retirement age from 65 to 67, taxation of benefits, cost of living adjustment (COLA) delays, and inclusion of new federal hires in the program. There was a key point during the debate when House members were forced to choose between raising the retirement age or raising future taxes; they chose the former. Senator Daniel Patrick Moynihan
indicated the compromises involved showed that lawmakers could still govern. Koitz cautions against the concept of a free lunch
; retirement security cannot be provided without benefit cuts or tax increases.
Economist Alice M. Rivlin summarized major reform proposals in January 2009: "Fixing Social Security is a relatively easy technical problem. It will take some combination of several much-discussed marginal changes: raising the retirement age gradually in the future (and then indexing it to longevity), raising the cap on the payroll tax, fixing the cost of living adjustment, and modifying the indexing of initial benefits so they grow more slowly for more affluent people. In view of the collapse of market values, no one is likely to argue seriously for diverting existing revenues to private accounts, so the opportunity to craft a compromise is much greater than it was a few years ago. Fixing Social Security would be a confidence building achievement for bi-partisan cooperation and would enhance our reputation for fiscal prudence."
Various institutions have analyzed different reform alternatives, including the CBO, US News & World Report, the AARP, and the Urban Institute
.
issued a draft presentation in November 2010 that estimated the effects of alternative solutions, along with an estimated program deficit reduction:
indicated preliminary views on Social Security reform. His website indicated that he "will work with members of Congress from both parties to strengthen Social Security and prevent privatization while protecting middle class families from tax increases or benefit cuts. As part of a bipartisan plan that would be phased in over many years, he would ask families making over $250,000 to contribute a bit more to Social Security to keep it sound." He has opposed raising the retirement age, privatization, or cutting benefits.
The COLA is computed based on the "Consumer Price Index
for Urban Wage Earners and Clerical Workers" or CPI-W. According to the CBO: "Many analysts believe that the CPI-W overstates increases in the cost of living because it does not fully account for the fact that consumers generally adjust their spending patterns as some prices change relative to others." However, CBO also reported that: "...CPI-E, an experimental version of the CPI that reflects the purchasing patterns of older people, has been 0.3 percentage points higher than the CPI-W over the past three decades." CBO estimates that reducing the COLA by 0.5% annually from its current computed amount would reduce the 75-year actuarial shortfall by 0.3% of GDP or about 50%. Reducing each year's COLA results in an annual compounding effect, with greater effect on those receiving benefits the longest.
There is disagreement about whether a reduction in the COLA constitutes a "benefit cut"; the Center for Budget and Policy Priorities considers any reduction in future promised benefits to be a "cut." However, others dispute this assertion because under any indexing strategy the actual or nominal amount of Social Security checks would never decrease but could increase at a lesser rate.
President Bush endorsed a version of this approach suggested by financier
Robert Pozen
, which would mix price and wage indexing in setting the initial benefit level. The "progressive
" feature is that the less generous price indexing would be used in greater proportion for retirees with higher incomes. The San Francisco Chronicle
gave this explanation:
As under the current system, all retirees would have their initial benefit amount adjusted periodically for price inflation
occurring after their retirement. Thus, the purchasing power
of the monthly benefit level would be frozen, rather than increasing by the difference between the (typically higher) CPI-W and (typically lower) CPI-U, a broader measure of inflation.
. President Bush's 2001 advisory board discussed ways that the system could be adjusted. Eliminating the cap would make this a more progressive tax and would reduce or eliminate the projected deficit. A 2001 Social Security advisory board report stated:
(GDP) higher every year for roughly two decades; U.S. GDP in 2008 was $14 trillion. The debt burden for every man, woman, and child would be $32,000 higher after 32 years because of privatization.
Privatization proponents counter that the savings to the government would come through a mechanism called a "clawback", where profits from private account investment would be taxed, or a benefit reduction meaning that individuals whose accounts underperformed the market would receive less than current benefit schedules, although, even in this instance, the heirs of those who die early could receive increased benefits even if the accounts underperformed historical returns.
Opponents of privatization also point out that, even conceding for sake of argument that what they call highly optimistic numbers are true, they fail to count what the transition will cost the country as a whole. Gary Thayer, chief economist for A.G. Edwards
, has been cited in the mainstream media
saying that the cost of privatizing— estimated by some at $1 trillion to $2 trillion— would worsen the federal budget deficit in the short term, and "That's not something I think the credit markets would appreciate." If, as in some plans, the interest expenditure on this debt is recaptured from the private accounts before any gains are available to the workers, then the net benefit could be small or nonexistent. And this is really a key to understanding the debate, because if, on the other hand, a system which mandated investment of all assets in U.S. Treasuries resulted in a positive net recapturing, this would illustrate that the captive nature of the system results in benefits that are lower than if it merely allowed investment in U.S. Treasuries (purported to be the safest investment on Earth).
Current Social Security system advocates claim that when the risks, overhead costs and borrowing costs of any privatization plan are taken together, the result is that such a plan has a lower expected rate of return than "pay as you go" systems. They point out the high overheads of privatized plans in the United Kingdom and Chile.
Both wholesale and partial privatization pose questions such as: 1) How much added risk will workers bear compared to the risks they face under current system? 2) What are the potential rewards? and 3) What happens at retirement to workers whose privatized risks turn out badly? For workers, privatization would mean smaller Social Security checks, in addition to increased compensation from returns on investments, according to historical precedent. Debate has ensued over the advisability of subjecting workers' retirement money to market risks.
A technical economic argument for privatization is that, without it, the payroll taxes that support Social Security constitute a tax wedge that reduces the supply of labor, like other tax financed government welfare programs. Liberal economists like Peter Orszag
and Joseph Stiglitz have argued that Social Security is already perceived as enough of a forced savings program to preclude a reduction in the labor supply. Richard Disney has agreed with this reply, noting that
To the extent that pension contributions are perceived as giving individuals rights to future pensions, the behavioral reaction of program participants to contributions will differ from their reactions to other taxes. In fact, they might regard pension contributions as providing an opportunity for retirement saving, in which case contributions should not be deducted [by economists] from household’s earnings and should not be included in the tax wedge.
Privatization advocates nonetheless do not believe that social security taxes will be sufficiently regarded as pension contributions as long as they remain legally structured as taxes (as opposed to being contributions to their own private pensions).
To the extent that pension contributions are perceived as giving individuals rights to future pensions, the behavioral reaction of program participants to contributions will differ from their reactions to other taxes. In fact, they might regard pension contributions as providing an opportunity for retirement saving, in which case contributions should not be deducted from household’s earnings and should not be included in the tax wedge.
Supporters of the current system maintain that its combination of low risks and low management costs, along with its social insurance provisions, work well for what the system was designed to provide: a baseline income for citizens derived from savings. From their perspective, the major deficiency of any privatization scheme is risk. Like any private investments, PRAs could fail to produce any return or could produce a lower return than proponents of privatization assert, and could even suffer a reduction in principal.
Advocates of privatization have long criticized Social Security for lower returns than the returns available from other investments, and cite numbers based on historical performance. The Heritage Foundation
, a conservative
think tank, calculates that a 40-year-old male with an income just under $60,000, will contribute $284,360 in payroll taxes to the Social Security trust fund over his working life, and can expect to receive $2,208 per month in return under the current program. They claim that the same 40-year-old male, investing the same $284,360 equally weighted into treasuries and high-grade corporate bonds over his working life, would own a PRA at retirement worth $904,982 which would pay an annuity of up to $7,372 per month (assuming that the dollar volume of such investments would not dilute yields so that they are lower than averages from a period in which no such dilution occurred.) Furthermore, they argue that the "efficiency" of the system should be measured not by costs as a percent of assets, but by returns after expenses (e.g. a 6% return reduced by 2% expenses would be preferable to a 3% return reduced by 1% expenses). Other advocates state that because privatization would increase the wealth of Social Security users, it would contribute to consumer spending, which in turn would cause economic growth.
Supporters of the current system argue that the long-term trend of U.S. securities markets cannot safely be extrapolated forward, because stock prices relative to earnings are already at very high levels by historical standards. They add that an exclusive focus on long-term trends would ignore the increased risks they think privatization would cause. The general upward trend has been punctuated by severe downturns. Critics of privatization point out that workers attempting to retire during any future such downturns, even if they prove to be temporary, will be placed at a severe disadvantage.
Proponents argue that a privatized system would open up new funds for investment in the economy, and would produce real growth. They claim that the treasuries held in the current trust fund are covering consumption rather than investments, and that their value rests solely upon the continued ability of the U.S. government to impose taxes. Michael Kinsley
has said that there would be no net new funds for investment, because any money diverted into private accounts would produce a dollar-for-dollar increase in the federal government's borrowing from other sources to cover its general deficit.
Meanwhile, some investment-minded observers among those who do not support privatization, point out potential pitfalls to the trust fund's undiversified portfolio, containing only treasuries. Many of these support the government itself investing the trust fund into other securities, to help boost the system's overall soundness through diversification
, in a plan similar to CalPERS
in the state of California
. Among the proponents of this idea were some members of President Bill Clinton
's 1996 Social Security commission that studied the issue; the majority of the group supported partial privatization, and other members put forth the idea that Social Security funds should themselves be invested in the private markets to gain a higher rate of return.
Another criticism of privatization is that while it might theoretically relieve the government of financial responsibility, in practice for every winner from moving risk from the collective to the individual there will be a loser, and the government will be held politically responsible for preventing those losers from slipping into poverty
. Proponents of the current system suspect that for the individuals whose risks turn out badly, these same individuals will support political action to raise state benefits, such that the risks such individuals may be willing to take under a privatized system are not without moral hazard
.
, but rather the role of government. Conservative Nobel Prize
-winning economist
Gary S. Becker, currently a graduate professor at the University of Chicago
, wrote in a February 15, 2005 article that "[privatization] reduce[s] the role of government in determining retirement ages and incomes, and improve[s] government accounting of revenues and spending obligations." He compares the privatization of Social Security to the privatization of the steel
industry, citing similar "excellent reasons."
Since the U.S. system is passively managed — with no specific funds being tied to specific investments within individual accounts, and with the system's surpluses being automatically invested only in treasuries — its management costs are very low.
Advocates of privatization at the Cato Institute
, a libertarian
think tank, counter that, "Based on existing private pension plans, it appears reasonable to assume that the costs of administering a well-run system of PRAs might be anywhere from a low of roughly 15 basis points (0.15%) to a high of roughly 50 basis points (0.5%)." They also point to the low costs of index fund
s (funds whose value rises or falls according to a particular financial index), including an S&P 500
index fund whose management fees run between 8 basis point (0.08%) and 10 basis points (0.10%).
brokerages and mutual fund
companies, who will rake in billions of dollars in management fees.
Austan Goolsbee
at the University of Chicago
has written a study, "The Fees of Private Accounts and the Impact of Social Security Privatization on Financial Managers", which calculates that, "Under Plan II of the President's Commission to Strengthen Social Security (CSSS), the net present value (NPV) of such payments would be $940 billion", and, "amounts to about one-quarter (25%) of the NPV of the revenue of the entire financial sector for the next 75 years", and concludes that, "The fees would be the largest windfall gain in American financial history." The Heritage Foundation has produced their own study, written by David C. John, specifically to counter Goolsbee.
Other analysts argue that dangers of a Wall Street windfall of such magnitude are being vastly overstated. Rob Mills, vice-president of the brokerage industry trade group Securities Industry Association
, calculated in a report published in December 2004 that the proposed private accounts might generate $39 billion in fees, in NPV terms, over the next 75 years. This amount would represent only 1.2% of the sector's projected NPV revenues of $3.3 trillion over that timeframe. He concludes that privatization is "hardly likely to be a bonanza for Wall Street." At the same time, the watchdogs at FactCheck
estimate that the financial management sector will receive only 0.05% and 0.27% of its total revenues from fees on PRAs (personal retirement accounts).
candidates during the 2000 elections, would set aside an initially small but increasing percentage of each worker's payroll tax into a 'lockbox', which the worker would be allowed to invest in securities. Another eliminated the Social Security payroll tax completely for workers born after a certain date, and allowed workers of different ages different periods of time during which they could opt to not pay the payroll tax, in exchange for a proportional delay in their receipt of payouts.
Most state pension plans invest a portion of employer and employee contributions in a mixture of stocks, bonds, real estate, etc., which they or professional fund managers invest on behalf of the employees, without creating individual investment accounts.
President George W. Bush
discussed the "partial privatization" of Social Security since the beginning of his presidency in 2001. But only after winning re-election in 2004 did he begin to invest his "political capital
" in pursuing changes in earnest.
In May 2001, he announced establishment of a 16-member bipartisan commission "to study and report specific recommendations to preserve Social Security for seniors while building wealth for younger Americans", with the specific directive that it consider only how to incorporate "individually controlled, voluntary personal retirement accounts". The majority of members serving on Bill Clinton
's similar Social Security commission in 1996 had recommended through their own report that partial privatization be implemented. Bush's Commission to Strengthen Social Security (CSSS) issued a report in December 2001 (revised in March 2002), which proposed three alternative plans for partial privatization:
On February 2, 2005, Bush made Social Security a prominent theme of his State of the Union Address
. In this speech, which sparked the debate, it was Plan II of CSSS's report that Bush outlined as the starting point for changes in Social Security. He outlined, in general terms, a proposal based on partial privatization. After a phase-in period, workers currently less than 55 years old would have the option to set aside four percentage points of their payroll taxes in individual accounts that could be invested in the private sector, in "a conservative mix of bonds and stock funds". Workers making such a choice might receive larger or smaller benefits than if they had not done so, depending on the performance of the investments they selected.
Although Bush described the Social Security system as "headed for bankruptcy
", his proposal would not affect the projected shortfall in Social Security tax receipts. Partial privatization would mean that some workers would pay less into the system's general fund and receive less back from it. Administration officials said that the proposal would have a "net neutral effect" on the system's financial situation, and that Bush would discuss with Congress how to fill the projected shortfall. The Congressional Budget Office
had previously analyzed the commission's "Plan II" (the plan most similar to Bush's proposal) and had concluded that the individual accounts would have little or no overall effect on the system's solvency, and that virtually all the savings would come instead from changing the benefits formula.
As illustrated by the CBO analysis, one possible approach to the shortfall would be benefit cuts that would affect all retirees, not just those choosing the private accounts. Bush alluded to this option, mentioning some suggestions that he linked to various former Democratic officeholders. He did not endorse any specific benefit cuts himself, however. He said only, "All these ideas are on the table." He expressed his opposition to any increase in Social Security taxes. Later that month, his press secretary, Scott McClellan
, ambiguously characterized raising or eliminating the cap on income subject to the tax as a tax increase that Bush would oppose.
In his speech, Bush did not address the issue of how the system would continue to provide benefits for current and near-future retirees if some of the incoming Social Security tax receipts were to be diverted into private accounts. A few days later, however, Vice-President
Dick Cheney
stated that the plan would require borrowing $758 billion over the period 2005 to 2014; that estimate has been criticized as being unrealistically low.
On April 28, 2005, Bush held a televised press conference at which he provided additional detail about the proposal he favored. For the first time, he endorsed reducing the benefits that some retirees would receive. He endorsed a plan from Robert Pozen
, described below in the section regarding suggestions for Social Security that do not involve privatization.
Although Bush's State of the Union speech left many important aspects of his proposal unspecified, debate began on the basis of the broad outline he had given.
To assist the effort, Republican
donors were asked after the election to help raise $50 million or more for a campaign in support of the proposal, with contributions expected from such sources as the conservative Club for Growth
and the securities industry. In 1983, a Cato Institute paper had noted that privatization would require "mobilizing the various coalitions that stand to benefit from the change, ... the business community, and financial institutions in particular ..." Soon after Bush's State of the Union speech, the Club for Growth began running television advertisements in the districts of Republican members of Congress whom it identified as undecided on the issue.
A group backed by labor unions called "Americans United to Protect Social Security" "set its sights on killing Bush's privatization plan and silencing his warnings that Social Security was 'headed toward bankruptcy.'"
On January 16, 2005, the New York Times reported internal Social Security Administration documents directing employees to disseminate the message that "Social Security's long-term financing problems are serious and need to be addressed soon", and to "insert solvency messages in all Social Security publications".
Coming soon after the disclosure of government payments to commentator Armstrong Williams
to promote the No Child Left Behind Act
, the revelation prompted the objection from Dana C. Duggins, a vice president of the Social Security Council of the American Federation of Government Employees
, that "Trust fund dollars should not be used to promote a political agenda."
In the weeks following his State of the Union speech, Bush devoted considerable time and energy to campaigning for privatization. He held "town meetings" at many locations around the country. Attendance at these meetings was controlled to ensure that the crowds would be supportive of Bush's plan. In Denver
, for example, three people who had obtained tickets through Representative Bob Beauprez
, a Republican, were nevertheless ejected from the meeting before Bush appeared, because they had arrived at the event in a car with a bumper sticker reading "No More Blood for Oil".
Opponents of Bush's plan have analogized his dire predictions about Social Security to similar statements that he made to muster support for the 2003 Invasion of Iraq
.
A dispute between the AARP
and a conservative
group for older Americans, USA Next
, cropped up around the time of the State of the Union speech. The AARP had supported Bush's plan for major changes in Medicare
in 2003, but it opposed his Social Security privatization initiative. In January 2005, before the State of the Union Address, the AARP ran advertisements attacking the idea. In response, USA Next launched a campaign against AARP. Charlie Jarvis of USA Next stated: "They [AARP] are the boulder in the middle of the highway to personal savings accounts. We will be the dynamite that removes them."
The tone of the debate between these two interest groups is merely one example among many of the tone of many of the debates, discussions, columns, advertisements, articles, letters, and white papers that Bush's proposal, to touch the "third rail", has sparked among politicians, pundits, thinktankers, and taxpayers.
Immediately after Bush's State of the Union speech, a national poll brought some good news for each side of the controversy. Only 17% of the respondents thought the Social Security system was "in a state of crisis", but 55% thought it had "major problems". The general idea of allowing private investments was favored by 40% and opposed by 55%. Specific proposals that received more support than opposition (in each case by about a two-to-one ratio) were "Limiting benefits for wealthy retirees" and "Requiring higher income workers to pay Social Security taxes on ALL of their wages". The poll was conducted by USA Today
, CNN
, and the Gallup Organization.
Bush's April press conference, in which for the first time he expressly endorsed benefit reductions, sparked disagreement about where the burden would fall. Bush referred to "people who are better off". Many media summaries accepted the characterization that "wealthy" retirees would be affected, and that benefits for lower-income people would grow. Opponents countered that middle-class retirees would also experience cuts, and that those below the poverty line would receive only what they are entitled to under current law. Democrats also expressed concern that a Social Security system that primarily benefited the poor would have less widespread political support. Finally, the issue of private accounts continued to be a divisive one. Many legislators remained opposed or dubious, while Bush, in his press conference, said he felt strongly about the point.
Despite Bush's emphasis on the issue, many Republicans in Congress were not enthusiastic about his proposal, and Democrats were unanimously opposed. In late May 2005, House Majority Whip Roy Blunt
listed the "priority legislation" to be acted on after Memorial Day
; Social Security was not included, and Bush's proposal was considered by many to be dead. In September, some Congressional Republicans pointed to the budgetary problems caused by Hurricane Katrina
as a further obstacle to acting on the Bush proposal. Congress did not enact any major changes to Social Security in 2005, or before its pre-election adjournment in 2006.
During the campaigning for the 2006 midterm election
, Bush stated that reviving his proposal for privatizing Social Security would be one of his top two priorities for his last two years in office. In 2007, he continued to pursue that goal by nominating Andrew Biggs, a privatization advocate and former researcher for the Cato Institute, to be deputy commissioner of the Social Security Administration. When the Senate did not confirm Biggs, Bush made a recess appointment
, enabling Biggs to hold the post without Senate confirmation until December 2008. During his last days in office, Bush said that spurring the debate on Social Security was his most effective achievement during his presidency.
is opposed to Social Security on ideological grounds, regarding it as a form of governmental redistribution of income from the wealthy, which other groups such as libertarians strongly oppose. Some of the critics of Bush's plan argued that its real purpose was not to save the current Social Security system, but to lay the groundwork for dismantling it. They note that, in 2000, when Bush was asked about a possible transition to a fully privatized system, he replied: "It's going to take a while to transition to a system where personal savings accounts are the predominant part of the investment vehicle. ... This is a step toward a completely different world, and an important step." His comment is consonant with the Cato Institute
's reference in 1983 to a "Leninist
strategy" for "guerrilla warfare
" against both the current Social Security system and the coalition that supports it."
Critics of the system, such as Nobel Laureate economist
Milton Friedman
, have said that Social Security redistributes wealth from the poor to the wealthy. http://www.ideachannel.tv/ Workers must pay 12.4%, including a 6.2% employer contribution, on their wages below the Social Security Wage Base
($102,000 in 2008), but no tax on income in excess of this amount. Therefore, high earners pay a lower percentage of their total income, resulting in a regressive tax
. The benefit paid to each worker is also calculated using the wage base on which the tax was paid. Changing the system to tax all earnings without increasing the benefit wage base would result in the system being a progressive tax
.
Furthermore, wealthier individuals generally have higher life expectancies and thus may expect to receive larger benefits for a longer period than poorer taxpayers, often minorities. A single individual who dies before age 62, who is more likely to be poor, receives no retirement benefits despite years of paying Social Security tax. On the other hand, an individual who lives to age 100, who is more likely to be wealthy, is guaranteed payments that are more than he or she paid into the system.
A factor working against wealthier individuals and in favor of the poor with little other retirement income is that Social Security benefits become subject to federal income tax based on income. The portion varies with income level, 50% at $32,000 rising to 85% at $44,000 for married couples in 2008. This does not just affect those that continue to work after retirement. Unearned income withdrawn from tax deferred retirement accounts, like IRAs
and 401(k)
s, counts towards taxation of benefits.
Still other critics focus on the quality of life issues associated with Social Security, claiming that while the system has provided for retiree pensions, their quality of life is much lower than it would be if the system were required to pay a fair rate of return. The party leadership on both sides of the aisle have chosen not to frame the debate in this manner, presumably because of the unpleasantness involved in arguing that current retirees would have a much higher quality of life if Social Security legislation mandated returns that were merely similar to the interest rate the U.S. government pays on its borrowings.
As such, the gift to the first generation is necessarily borne by subsequent generations. In this pay-as-you-go system, current workers are paying the benefits of the previous generation, instead of investing for their own retirement, and therefore, attempts at privatizing Social Security could result in workers having to pay twice: once to fund the benefits of current retirees, and a second time to fund their own retirement.
, where early "investors" are paid off out of the funds collected from later investors instead of out of profits from business activity, has similarities with Social Security's pay-as-you-go funding mechanism, in particular a sustainability problem when there is a declining number of new paying entrants.
William G. Shipman of the Cato Institute
argues:
Paul Krugman
has also echoed this 'Ponzi Scheme' allegation. Commenting on the redistributionary nature of Social Security, Krugman once wrote "Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today's young may well get less than they put in)."
This criticism is not new. In his 1936 presidential campaign, Republican Alf Landon
called the trust fund "a cruel hoax". The Republican platform that year stated, "The so-called reserve fund estimated at forty-seven billion dollars for old age insurance is no reserve at all, because the fund will contain nothing but the Government's promise to pay, while the taxes collected in the guise of premiums will be wasted by the Government in reckless and extravagant political schemes."
The Baby Boomer demographic groups and future demographic groups will be putting as much money via the FICA tax into Social Security as they will be receiving. The generosity of the government to past generations created the projected Social Security deficits. (The kindness of the government to past generations in part was because of the recognition to mothers, as mothers gave up their children to serve and oftentimes die in defense of the country.)
The Social Security Administration responds to the criticism as follows:
Social Security (United States)
In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...
is a social insurance
Social security
Social security is primarily a social insurance program providing social protection or protection against socially recognized conditions, including poverty, old age, disability, unemployment and others. Social security may refer to:...
program officially called "Old-Age, Survivors, and Disability Insurance" (OASDI), in reference to its three components. It is primarily funded through a dedicated payroll tax
Payroll tax
Payroll tax generally refers to two different kinds of similar taxes. The first kind is a tax that employers are required to withhold from employees' wages, also known as withholding tax, pay-as-you-earn tax , or pay-as-you-go tax...
. During 2009, total benefits of $686 billion were paid out versus income (taxes and interest) of $807 billion, a $121 billion annual surplus. An estimated 156 million people paid into the program and 53 million received benefits, roughly 2.94 workers per beneficiary.
Reform proposals continue to circulate with some urgency, due to a long-term funding challenge faced by the program. Starting in 2015 and continuing thereafter, program expenses are expected to exceed cash revenues. This is due to the aging of the baby-boom generation (resulting in a lower ratio of paying workers to retirees), expected continuing low birth rate
Birth rate
Crude birth rate is the nativity or childbirths per 1,000 people per year . Another word used interchangeably with "birth rate" is "natality". When the crude birth rate is subtracted from the crude death rate, it reveals the rate of natural increase...
(compared to the baby-boom period), and increasing life expectancy
Life expectancy
Life expectancy is the expected number of years of life remaining at a given age. It is denoted by ex, which means the average number of subsequent years of life for someone now aged x, according to a particular mortality experience...
. Further, the government has borrowed and spent the accumulated surplus funds, called the Social Security Trust Fund
Social Security Trust Fund
In the United States, the Social Security Trust Fund is a fund operated by the Social Security Administration into which are paid contributions from workers and employers under the Social Security system and out of which benefit payments to retirees, survivors, and the disabled, and general...
.
During 2011 the Trust Fund held $2.6 trillion, up from $2.5 trillion in 2010. The Trust Fund consists of the savings of worker contributions and associated interest, to be used towards future benefit payments. Funds are held in United States Treasury bonds and U.S. securities backed "by the full faith and credit of the government". The funds borrowed from worker contributions are part of the total national debt of $14.3 trillion as of March 2011. By 2015, the government is expected to have borrowed nearly $3.25 trillion from the Social Security Trust Fund.
Between 2015 and 2037, Social Security has the legal authority to draw amounts from other government tax sources besides the payroll tax, to fully fund the program. However, this will liquidate the Trust Fund during that period. By 2037, the Trust Fund is expected to be officially exhausted, meaning that only the ongoing payroll tax collections thereafter will be available to fund the program. There are certain key implications to understand under current law, if no reforms are implemented:
- Payroll taxes will only cover 78% of the scheduled payout amounts after 2037. This declines to 75% by 2084. Without changes to the law, Social Security would have no legal authority to draw other government funds to cover the shortfall and payments would decline without a large tax/revenue increase or increase in eligibility age.
- Between 2015 and 2037, redemption of the trust fund balance to pay retirees will draw approximately $4 trillion in government funds from sources other than payroll taxes. This is a funding challenge for the government overall, not just Social Security.
- The present valuePresent valuePresent value, also known as present discounted value, is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk...
of unfunded obligations under Social Security as of August 2010 was approximately $5.4 trillion. In other words, this amount would have to be set aside today such that the principal and interest would cover the shortfall over the next 75 years. The estimated annual shortfall averages 1.92% of the payroll tax base or 1.0% of gross domestic productGross domestic productGross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
. - The annual cost of Social Security benefits represented 4.8% of GDPGross domestic productGross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(a measure of the size of the economy) in 2009. This is projected to increase gradually to 6.1% of GDP in 2035 and then decline to about 5.9% of GDP by 2050 and remain at about that level.
Former President George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
called for a transition to a combination of a government-funded program and personal accounts ("individual accounts" or "private accounts") through partial privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
of the system. President Barack Obama "strongly opposes" privatization or raising the retirement age, but supports raising the cap on the payroll tax ($106,800 in 2009) to help fund the program.
Federal Reserve Chairman Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....
said on October 4, 2006: "Reform of our unsustainable entitlement programs should be a priority." He added, "the imperative to undertake reform earlier rather than later is great." The tax increases or benefit cuts required to maintain the system as it exists under current law are significantly higher the longer such changes are delayed. For example, raising the payroll tax rate to 14.4% during 2009 (from the current 12.4%) or cutting benefits by 13.3% would address the program's budgetary concerns indefinitely; these amounts increase to around 16% and 24% if no changes are made until 2037.
Background on funding challenges
Social Security (United States)
In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...
is funded through the Federal Insurance Contributions Act tax
Federal Insurance Contributions Act tax
Federal Insurance Contributions Act tax is a United States payroll tax imposed by the federal government on both employees and employers to fund Social Security and Medicare —federal programs that provide benefits for retirees, the disabled, and children of deceased workers...
(FICA), a payroll tax. Employers and employees are responsible for making equal FICA contributions. During 2009, Social Security taxes were levied on the first $106,800 of income for employment; amounts earned above that are not taxed. Covered workers are eligible for retirement
Retirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...
and disability
Disability
A disability may be physical, cognitive, mental, sensory, emotional, developmental or some combination of these.Many people would rather be referred to as a person with a disability instead of handicapped...
benefits. If a covered worker dies, his or her spouse and children may receive survivors' benefits. Social Security accounts are not the property of their beneficiary and are used solely to determine benefit levels. Social Security funds are not invested on behalf beneficiaries. Instead, current receipts are used to pay current benefits (the system known as "pay-as-you-go
PAYGO
PAYGO is the practice in the United States of financing expenditures with funds that are currently available rather than borrowed.-Budgeting:The PAYGO compels new spending or tax changes not to add to the federal deficit. Not to be confused with pay-as-you-go financing, which is when a government...
"), as is typical of some insurance and defined-benefit plans.
In each year since 1983, tax receipts and interest income have exceeded benefit payments and other expenditures, most recently (in 2009) by more than $120 billion. However, this annual "surplus" is expected to change to a deficit around 2015, when payments begin to exceed receipts and interest thereafter. The fiscal pressures are due to demographic
Demographics
Demographics are the most recent statistical characteristics of a population. These types of data are used widely in sociology , public policy, and marketing. Commonly examined demographics include gender, race, age, disabilities, mobility, home ownership, employment status, and even location...
trends, where the number of workers paying into the program continues declining relative to those receiving benefits. The number of workers paying into the program was 5.1 per retiree in 1960; this declined to 3.3 in 2007 and is projected to decline to 2.1 by 2035. Further, life expectancy continues to increase, meaning retirees collect benefits longer. Federal Reserve Chairman Bernanke has indicated that the aging of the population is a long-term trend, rather than a proverbial "pig moving through the python."
The accumulated surpluses are invested in special non-marketable Treasury securities
Treasury security
A United States Treasury security is government debt issued by the United States Department of the Treasury through the Bureau of the Public Debt. Treasury securities are the debt financing instruments of the United States federal government, and they are often referred to simply as Treasuries...
(treasuries) issued by the U.S. government, which are deposited in the Social Security Trust Fund
Social Security Trust Fund
In the United States, the Social Security Trust Fund is a fund operated by the Social Security Administration into which are paid contributions from workers and employers under the Social Security system and out of which benefit payments to retirees, survivors, and the disabled, and general...
. At the end of 2009, the Trust Fund stood at $2.5 trillion. The $2.5 trillion amount owed by the federal government to the Social Security Trust Fund is also a component of the U.S. National Debt, which stood at $13.3 trillion as of August 2009. By 2019, the government is expected to have borrowed nearly $3.8 trillion against the Social Security Trust Fund.
The CBO
Congressional Budget Office
The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....
projected in 2010 that an increase in payroll taxes ranging from 1.6%-2.1% of the payroll tax base, equivalent to 0.6%-0.8% of GDP, would be necessary to put the Social Security program in fiscal balance for the next 75 years. In other words, raising the payroll tax rate to about 14.4% during 2009 (from the current 12.4%) or cutting benefits by 13.3% would address the program's budgetary concerns indefinitely; these amounts increase to around 16% and 24% if no changes are made until 2037. The value of unfunded obligations under Social Security during FY 2009 was approximately $5.4 trillion. In other words, this amount would have to be set aside today such that the principal and interest would cover the shortfall over the next 75 years. Projections of Social Security's solvency are sensitive to assumptions about rates of economic growth and demographic changes.
Because Social Security receipts currently exceed payments, the program also reduces the size of the annual federal budget deficit. For example, the budget deficit would have been $182 billion higher in 2007 (i.e., $344 billion rather than $162 billion published) if Social Security were accounted for separately from the overall budget.
Increasing unemployment due to the subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
of 2008-2010 has significantly reduced the amount of payroll tax income that funds Social Security. Further, the crisis also caused more to apply for both retirement and disability benefits than expected. During 2009, payroll taxes and taxation of benefits resulted in cash revenues of $689.2 billion, while payments totaled $685.8 billion, resulting in a cash surplus (excluding interest) of $3.4 billion. Interest of $118.3 billion meant that the Social Security Trust Fund overall increased by $121.7 billion (i.e., the cash surplus plus interest). The 2009 cash surplus of $3.4 billion was a significant reduction from the $63.9 billion cash surplus of 2008.
The Center on Budget and Policy Priorities
Center on Budget and Policy Priorities
The Center on Budget and Policy Priorities is a non-profit think tank that describes itself as a "policy organization ... working at the federal and state levels on fiscal policy and public programs that affect low- and moderate-income families and individuals."The Center examines the short- and...
wrote in 2010: "The 75-year Social Security shortfall is about the same size as the cost, over that period, of extending the 2001 and 2003 tax cuts for the richest 2 percent of Americans (those with incomes above $250,000 a year). Members of Congress cannot simultaneously claim that the tax cuts for people at the top are affordable while the Social Security shortfall constitutes a dire fiscal threat."
Current projections
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
.
However, the funds from loans made have been spent along with other revenues in the general funds in satisfying annual budgets. At some point, however, absent any change in the law, the Social Security Administration will finance payment of benefits through the net redemption of the assets in the trust fund. Because those assets consist solely of U.S. government securities, their redemption will represent a call on the federal government's general fund, which for decades has been borrowing the Trust Fund's surplus and applying it to its expenses to partially satisfy budget deficits. To finance such a projected call on the general fund, some combination of increasing taxes, cutting other government spending or programs, selling government assets, or borrowing would be required.
The balances in the trust fund are projected to be depleted either by 2036 (OASDI Trustees' 2011 projection), or by 2038 (Congressional Budget Office's extended-baseline scenario) assuming proper and continuous repayment of the outstanding treasury notes. At that point, under current law, the system's benefits would have to be paid from the FICA tax alone. Revenues from FICA are projected at that point to be continue to cover about 77% of projected Social Security benefits if no change is made to the current tax and benefit schedules.
Ideological arguments
Ideology plays a major part of framing the Social Security debate. Key points of philosophical debate include, among others:- degree of ownership and choice among investment alternatives in determining one's own financial future;
- the right and extent of government taxation and wealth redistribution;
- trade-offs between social insurance and wealth creation;
- whether the program represents (or is perceived) as a charitable safety net (entitlement) or earned benefits; and
- intergenerational equity, meaning the rights of those living today to impose burdens on future generations.
Retirees and others who receive Social Security benefits have become an important bloc of voters in the United States. Indeed, Social Security has been called "the third rail
Third rail (metaphor)
The phrase third rail is a metaphor in politics to denote an idea or topic that is so "charged" and "untouchable" that any politician or public official who dares to broach the subject would invariably suffer politically.-Denotation:...
of American politics" — meaning that any politician sparking fears about cuts in benefits by touching the program endangers his or her political career. The New York Times
The New York Times
The New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...
wrote in January 2009 that Social Security and Medicare
Medicare (United States)
Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...
"have proved almost sacrosanct in political terms, even as they threaten to grow so large as to be unsustainable in the long run."
Conservative ideological arguments
Conservatives argue that Social Security reduces individual ownership by redistributing wealth from workers to retirees and bypassing the free market. Social Security taxes paid into the system cannot be passed to future generations, as private accounts can, thereby preventing the accumulation of wealth to some degree. Private accounts also have a much higher rate of return than Social Security accounts. Conservatives tend to argue for a fundamental change in the structure of the program. Conservatives also argue that the US Constitution does not permit the Congress to set up a savings plan for retirees (leaving this authority to the states), although the U.S. Supreme Court ruled in Helvering v. DavisHelvering v. Davis
Helvering v. Davis, 301 U.S. 619 , was a decision by the United States Supreme Court, which held that Social Security was not a contributory insurance program. The Court defended the constitutionality of the Social Security Act of 1935, requiring only that welfare spending be for the common benefit...
that Congress had this authority.
Liberal ideological arguments
Liberals argue that government has the obligation to provide social insurance, through mandatory participation and broad program coverage. During 2004, Social Security constituted more than half of the income of nearly two-thirds of retired Americans. For one in six, it is their only income. Liberals tend to defend the current program, preferring tax increases and payment modifications.Pro-privatization arguments
The conservative position is often pro-privatization. There are countries other than the U.S. that have set up individual accounts for individual workers, which allow workers leeway in decisions about the securities in which their accounts are invested, which pay workers after retirement through annuities funded by the individual accounts, and which allow the funds to be inherited by the workers' heirs. Such systems are referred to as 'privatized.' Currently, the United Kingdom, Sweden, and ChileChile
Chile ,officially the Republic of Chile , is a country in South America occupying a long, narrow coastal strip between the Andes mountains to the east and the Pacific Ocean to the west. It borders Peru to the north, Bolivia to the northeast, Argentina to the east, and the Drake Passage in the far...
are the most frequently cited examples of privatized systems. The experiences of these countries are being debated as part of the current Social Security controversy.
In the United States in the late 1990s, privatization found advocates who complained that U.S. workers, paying compulsory payroll taxes into Social Security, were missing out on the high rates of return of the U.S. stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
(the Dow
Dow Jones Industrial Average
The Dow Jones Industrial Average , also called the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...
averaged 5.3% compounded annually for the 20th century). They likened their proposed "Private Retirement Accounts" (PRAs) to the popular Individual Retirement Account
Individual Retirement Account
An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
s (IRAs) and 401(k) savings plans. But in the meantime, several conservative and libertarian organizations that considered it a crucial issue, such as the Heritage Foundation
Heritage Foundation
The Heritage Foundation is a conservative American think tank based in Washington, D.C. Heritage's stated mission is to "formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong...
and Cato Institute
Cato Institute
The Cato Institute is a libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Edward H. Crane, who remains president and CEO, and Charles Koch, chairman of the board and chief executive officer of the conglomerate Koch Industries, Inc., the largest privately held...
, continued to lobby for some form of Social Security privatization.
Anti-privatization arguments
The liberal position is typically anti-privatization. Those who have taken an anti-privatization position argue several points (among others), including:- Privatization does not address Social Security's long-term funding challenges. The program is "pay as you go", meaning current payroll taxes pay for current retirees. Diverting payroll taxes (or other sources of government funds) to fund private accounts would drive enormous deficits and borrowing ("transition costs").
- Privatization converts the program from a "defined benefits" plan to a "defined contribution" plan, subjecting the ultimate payouts to stock or bond market fluctuations;
- Social Security payouts are indexed to wages, which historically have exceeded inflation. As such, Social Security payments are protected from inflation, while private accounts might not be;
- Privatization would represent a windfall for Wall Street financial institutions, who would obtain significant fees for managing private accounts.
- Privatization in the midst of the greatest economic downturn since the Great Depression would have caused households to have lost even more of their assets, had their investments been invested in the U.S. stock market.
Alternate views
Accordingly, advocates of major change in the system generally argue that drastic action is necessary because Social Security is facing a crisis. In his 2005 State of the Union speech, President Bush indicated that Social Security was facing "bankruptcy." In his 2006 State of the Union speech, he described entitlement reform (including Social Security) as a "national challenge" that, if not addressed timely, would "present future Congresses with impossible choices -- staggering tax increases, immense deficits, or deep cuts in every category of spending."A liberal
Liberalism
Liberalism is the belief in the importance of liberty and equal rights. Liberals espouse a wide array of views depending on their understanding of these principles, but generally, liberals support ideas such as constitutionalism, liberal democracy, free and fair elections, human rights,...
think tank, The Center for Economic and Policy Research, says that "Social Security is more financially sound today than it has been throughout most of its 69-year history" and that Bush's statement should have no credibility.
Nobel Laureate economist Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
, deriding what he called "the hype about a Social Security crisis", wrote:
The claims of the probability of future difficulty with the current Social Security system are largely based on the annual analysis made of the system and its prospects and reported by the governors of the Social Security system. While such analysis can never be 100% accurate, it can at least be made using different probable future scenarios and be based on rational assumptions and reach rational conclusions, with the conclusions being no better (in terms of predicting the future) than the assumptions on which the predictions are based. With these predictions in hand, it is possible to make at least some prediction of what the future retirement security of Americans who will rely on Social Security might be. It is worth noting that James Roosevelt, former associate commissioner for Retirement Policy for the Social Security Administration, claims that the "crisis" is more a myth than a fact.
Proponents of the current system argue if and when the trust fund runs out, there will still be the choice of raising taxes or cutting benefits, or both. Advocates of the current system say that the projected deficits in Social Security are identical to the "prescription drug benefit" enacted in 2002. They say that demographic and revenue projections might turn out to be too pessimistic — and that the current health of the economy exceeds the assumptions used by the Social Security Administration.
These Social Security proponents argue that the correct plan is to fix Medicare
Medicare (United States)
Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...
, which is the largest underfunded entitlement, repeal the 2001–2004 tax cuts, and balance the budget. They believe a growth trendline will emerge from these steps, and the government can alter the Social Security mix of taxes, benefits, benefit adjustments and retirement age to avoid future deficits. The age at which one begins to receive Social Security benefits has been raised several times since the program's inception.
Proposals that keep an entirely government-run system
Robert L. Clark, an economist at North Carolina State UniversityNorth Carolina State University
North Carolina State University at Raleigh is a public, coeducational, extensive research university located in Raleigh, North Carolina, United States. Commonly known as NC State, the university is part of the University of North Carolina system and is a land, sea, and space grant institution...
who specializes in aging issues, formerly served as a chairman of a national panel on Social Security's financial status; he has said that future options for Social Security are clear: "You either raise taxes or you cut benefits. There are lots of ways to do both."
David Koitz, a 30-year veteran of the Congressional Research Service
Congressional Research Service
The Congressional Research Service , known as "Congress's think tank", is the public policy research arm of the United States Congress. As a legislative branch agency within the Library of Congress, CRS works exclusively and directly for Members of Congress, their Committees and staff on a...
, echoed these remarks in his 2001 book Seeking Middle Ground on Social Security Reform: "The real choices for resolving the system's problems...require current lawmakers to raise revenue or cut spending--to change the law now to explicitly raise future taxes or constrain future benefits." He discusses the 1983 Social Security amendments that followed the Greenspan Commission's recommendations. It was the Commission's recommendations that provided political cover for both political parties to act. The changes approved by President Reagan in 1983 were phased in over time and included raising the retirement age from 65 to 67, taxation of benefits, cost of living adjustment (COLA) delays, and inclusion of new federal hires in the program. There was a key point during the debate when House members were forced to choose between raising the retirement age or raising future taxes; they chose the former. Senator Daniel Patrick Moynihan
Daniel Patrick Moynihan
Daniel Patrick "Pat" Moynihan was an American politician and sociologist. A member of the Democratic Party, he was first elected to the United States Senate for New York in 1976, and was re-elected three times . He declined to run for re-election in 2000...
indicated the compromises involved showed that lawmakers could still govern. Koitz cautions against the concept of a free lunch
Free lunch
The phrase free lunch, in U.S. literature from about 1870 to 1920, refers to a tradition once common in saloons in many places in the United States. These establishments included a "free" lunch, varying from rudimentary to quite elaborate, with the purchase of at least one drink. These free lunches...
; retirement security cannot be provided without benefit cuts or tax increases.
Economist Alice M. Rivlin summarized major reform proposals in January 2009: "Fixing Social Security is a relatively easy technical problem. It will take some combination of several much-discussed marginal changes: raising the retirement age gradually in the future (and then indexing it to longevity), raising the cap on the payroll tax, fixing the cost of living adjustment, and modifying the indexing of initial benefits so they grow more slowly for more affluent people. In view of the collapse of market values, no one is likely to argue seriously for diverting existing revenues to private accounts, so the opportunity to craft a compromise is much greater than it was a few years ago. Fixing Social Security would be a confidence building achievement for bi-partisan cooperation and would enhance our reputation for fiscal prudence."
Various institutions have analyzed different reform alternatives, including the CBO, US News & World Report, the AARP, and the Urban Institute
Urban Institute
The Urban Institute is a Washington, D.C.-based think tank that carries out nonpartisan economic and social policy research, collects data, evaluates social programs, educates the public on key domestic issues, and provides advice and technical assistance to developing governments abroad...
.
CBO study
The CBO reported in July 2010 the effects of a series of policy options on the "actuarial balance" shortfall, which over the 75 year horizon is approximately 0.6% of GDP. On a GDP of $14.5 trillion, this represents approximately $90 billion per year; the dollar amount would grow along with GDP. For example, CBO estimated that raising the payroll tax by two percentage points (from 12.4% to 14.4%) over 20 years would increase annual program revenues by 0.6% of GDP, solving the 75-year shortfall. The effects of different policy alternatives are summarized in the CBO chart included at right, from page IX of its report.AARP study
Revenue raisers
- Raise the cap to 90% of taxable earnings
Approximately 39% reduction in shortfall
- PRO: Affects only 6% of taxpayers or top 15% of income.
Can be phased in gradually.
Not a new tax, restores prior policy.- CON: It's a tax increase for higher earners.
- Increase payroll tax rate
Each 0.5% tax rate increase addresses 23% of shortfall.
- PRO: A gradual increase would maintain 75-year solvency.
- CON: A regressive tax increase that adversely affect workers.
- Raise taxes on benefits
10% reduction in shortfall
This amounts to a reduction in the benefit to high wage earners so the pros and cons are purely subjective.- Preserve tax on estates over $3.5 million
27% reduction in shortfall
- PRO: Improves tax progressivity, affects only 1/2 of 1% of all estates.
- CON: Would alter the President Bush's tax-cutting plans.
- Extend coverage to newly hired state and local government employees
10% reduction in shortfall
- PRO: Makes Social Security universal, with all sharing obligations and benefits.
- CON: State and local governments employees might get less retirement benefits.
- Invest 15% of the trust funds in stock and bond index funds
10% reduction in shortfall
- PRO: In the most optimistic scenario, the trust would earn higher returns on its investment.
- CON: Since the US government has a debt, this amounts to borrowing money in bonds to invest in the stock market, or margin trading.
Cost of transition between $600 billion - $3 trillion.
Less likely scenarios involve lower or negative returns.
Cost trimmers
- Adjust the COLA
18% reduction in shortfall
- PRO: Saves money.
- CON: This would set the standard of living afforded by Social Security to the level the individual could achieve at their date of initial benefit.
The current plan allows for an increased standard of living based on productivity increases made in the US economy.- Increase normal retirement age to 70
36% reduction in shortfall
- PRO: Links retirement more closely to life expectancy and increased worker health since program inception.
- CON: Reduces benefits.
Unfair to those forced to retire early but not otherwise eligible for other Social Security benefits.- Progressive Indexing - Index benefits to prices, not wages
100% reduction in shortfall
- PRO: Could eliminate shortfall.
- CON: Reduces the growth in scheduled benefits over time.
Urban Institute study
The Urban Institute estimated the effects of alternative solutions during May 2010, along with an estimated program deficit reduction:- Reducing the COLA by one percentage point: 75%
- Increasing the full retirement age to 68: 30%
- Indexing the COLA to prices rather than wages, except for bottom one-third of income earners: 65%
- Raising the payroll tax cap (currently at $106,800) to cover 90% instead of 84% of earnings: 35%
- Raising the payroll tax rate by one percentage point: 50%.
President Obama's Fiscal Reform Commission
The co-chairmen of the National Commission on Fiscal Responsibility and ReformNational Commission on Fiscal Responsibility and Reform
The National Commission on Fiscal Responsibility and Reform is a Presidential Commission created in 2010 by President Barack Obama to identify "…policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run."...
issued a draft presentation in November 2010 that estimated the effects of alternative solutions, along with an estimated program deficit reduction:
- Raising the payroll tax cap to cover 90% of earnings: 35%
- Indexing retirement age to life expectancy: 21%
- Adjusting the COLA formula to reflect chained CPI (e.g., reduce the COLA): 26%
President Obama's proposals
As of September 14, 2008, Barack ObamaBarack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
indicated preliminary views on Social Security reform. His website indicated that he "will work with members of Congress from both parties to strengthen Social Security and prevent privatization while protecting middle class families from tax increases or benefit cuts. As part of a bipartisan plan that would be phased in over many years, he would ask families making over $250,000 to contribute a bit more to Social Security to keep it sound." He has opposed raising the retirement age, privatization, or cutting benefits.
Cost of living adjustment
The current system sets the initial benefit level based on the retiree's past wages. The benefit level is based on the 35 highest years of earnings. This initial amount is then subject to an annual "Cost of Living Adjustment" or COLA. Recent COLA were 2.3% in 2007, 5.8% in 2008, and zero for 2009-2011.The COLA is computed based on the "Consumer Price Index
Consumer price index
A consumer price index measures changes in the price level of consumer goods and services purchased by households. The CPI, in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of...
for Urban Wage Earners and Clerical Workers" or CPI-W. According to the CBO: "Many analysts believe that the CPI-W overstates increases in the cost of living because it does not fully account for the fact that consumers generally adjust their spending patterns as some prices change relative to others." However, CBO also reported that: "...CPI-E, an experimental version of the CPI that reflects the purchasing patterns of older people, has been 0.3 percentage points higher than the CPI-W over the past three decades." CBO estimates that reducing the COLA by 0.5% annually from its current computed amount would reduce the 75-year actuarial shortfall by 0.3% of GDP or about 50%. Reducing each year's COLA results in an annual compounding effect, with greater effect on those receiving benefits the longest.
There is disagreement about whether a reduction in the COLA constitutes a "benefit cut"; the Center for Budget and Policy Priorities considers any reduction in future promised benefits to be a "cut." However, others dispute this assertion because under any indexing strategy the actual or nominal amount of Social Security checks would never decrease but could increase at a lesser rate.
Progressive indexing
"Progressive indexing" would lower the COLA or benefit levels for higher wage groups, with no impact or lesser impact on lower-wage groups. The Congressional Research Service reported that:"Progressive indexing," would index initial benefits for low earners to wage growth (as under current law), index initial benefits for high earners to price growth (resulting in lower projected benefits compared to current-law promised benefits), and index benefits for middle earners to a combination of wage growth and price growth.
President Bush endorsed a version of this approach suggested by financier
Financier
Financier is a term for a person who handles typically large sums of money, usually involving money lending, financing projects, large-scale investing, or large-scale money management. The term is French, and derives from finance or payment...
Robert Pozen
Robert Pozen
Robert C. Pozen is an American financial executive with a strong interest in public policy. He is the former chairman of MFS Investment Management, the oldest mutual fund company in the United States...
, which would mix price and wage indexing in setting the initial benefit level. The "progressive
Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
" feature is that the less generous price indexing would be used in greater proportion for retirees with higher incomes. The San Francisco Chronicle
San Francisco Chronicle
thumb|right|upright|The Chronicle Building following the [[1906 San Francisco earthquake|1906 earthquake]] and fireThe San Francisco Chronicle is a newspaper serving primarily the San Francisco Bay Area of the U.S. state of California, but distributed throughout Northern and Central California,...
gave this explanation:
Under Pozen's plan, which is likely to be significantly altered even if the concept remains in legislation, all workers who earn more than about $25,000 a year would receive some benefit cuts. For example, those who retire in 50 years while earning about $36,500 a year would see their benefits reduced by 20 percent from the benefits promised under the current plan. Those who earn $90,000 — the maximum income in 2005 for payroll taxes — and retire in 2055 would see their benefits cut 37 percent.
As under the current system, all retirees would have their initial benefit amount adjusted periodically for price inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
occurring after their retirement. Thus, the purchasing power
Purchasing power
Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing...
of the monthly benefit level would be frozen, rather than increasing by the difference between the (typically higher) CPI-W and (typically lower) CPI-U, a broader measure of inflation.
Adjustments to the payroll tax limit
During 2009, payroll taxes were levied on the first $106,800 of income; earnings above that amount are not taxed. Approximately 6% of the population earns over this amount, which represents approximately 15% of total wage income. Because of this limit, people with higher incomes pay a lower percentage of tax than people with lower incomes; the payroll tax is therefore a regressive taxRegressive tax
A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the...
. President Bush's 2001 advisory board discussed ways that the system could be adjusted. Eliminating the cap would make this a more progressive tax and would reduce or eliminate the projected deficit. A 2001 Social Security advisory board report stated:
- Making all earnings covered by Social Security subject to the payroll tax beginning in 2002, but retaining the current law limit for benefit computations (in effect removing the link between earnings and benefits at higher earnings levels), would eliminate the deficit. If benefits were to be paid on the additional earnings, 88 percent of the deficit would be eliminated.
Diamond-Orszag Plan
Peter A. Diamond and Peter R. Orszag proposed in their 2005 book Saving Social Security-A Balanced Approach that Social Security be stabilized by various tax and spend adjustments and gradually ending the process by which the general fund has been borrowing from payroll taxes. This requires increased revenues devoted to Social Security. Their plan, as with several other Social Security stabilization plans, relies on gradually increasing the retirement age, raising the ceiling on which people must pay FICA taxes, and slowly increasing the FICA tax rate to a peak of 15% total from the current 12.4%.Cost of transition and long-term funding concerns
Critics argue that privatizing Social Security does nothing to address the long-term funding concerns. Diverting funds to private accounts would reduce available funds to pay current retirees, requiring significant borrowing. An analysis by the Center on Budget and Policy Priorities estimates that President Bush's 2005 privatization proposal would add $1 trillion in new federal debt in its first decade of implementation and $3.5 trillion in the decade thereafter. The 2004 Economic Report of the President found that the federal budget deficit would be more than 1 percent of gross domestic productGross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(GDP) higher every year for roughly two decades; U.S. GDP in 2008 was $14 trillion. The debt burden for every man, woman, and child would be $32,000 higher after 32 years because of privatization.
Privatization proponents counter that the savings to the government would come through a mechanism called a "clawback", where profits from private account investment would be taxed, or a benefit reduction meaning that individuals whose accounts underperformed the market would receive less than current benefit schedules, although, even in this instance, the heirs of those who die early could receive increased benefits even if the accounts underperformed historical returns.
Opponents of privatization also point out that, even conceding for sake of argument that what they call highly optimistic numbers are true, they fail to count what the transition will cost the country as a whole. Gary Thayer, chief economist for A.G. Edwards
A.G. Edwards
A.G. Edwards, Inc. was an American financial services holding company; its principal wholly owned subsidiary was A.G. Edwards & Sons, Inc., which operated as a full-service securities broker-dealer in the United States and Europe. The firm was acquired by Wachovia Securities, which later was...
, has been cited in the mainstream media
Mainstream media
Mainstream media are those media disseminated via the largest distribution channels, which therefore represent what the majority of media consumers are likely to encounter...
saying that the cost of privatizing— estimated by some at $1 trillion to $2 trillion— would worsen the federal budget deficit in the short term, and "That's not something I think the credit markets would appreciate." If, as in some plans, the interest expenditure on this debt is recaptured from the private accounts before any gains are available to the workers, then the net benefit could be small or nonexistent. And this is really a key to understanding the debate, because if, on the other hand, a system which mandated investment of all assets in U.S. Treasuries resulted in a positive net recapturing, this would illustrate that the captive nature of the system results in benefits that are lower than if it merely allowed investment in U.S. Treasuries (purported to be the safest investment on Earth).
Current Social Security system advocates claim that when the risks, overhead costs and borrowing costs of any privatization plan are taken together, the result is that such a plan has a lower expected rate of return than "pay as you go" systems. They point out the high overheads of privatized plans in the United Kingdom and Chile.
Rate of return and individual initiative
Even some of those who oppose privatization agree that if current future promises to the current young generation are kept in the future, they will experience a much lower rate of return than past retirees have. Under privatization, each worker's benefit would be the combination of a minimum guaranteed benefit and the return on the private account. The proponents' argument is that projected returns (higher than those individuals currently receive from Social Security) and ownership of the private accounts would allow lower spending on the guaranteed benefit, but possibly without any net loss of income to beneficiaries.Both wholesale and partial privatization pose questions such as: 1) How much added risk will workers bear compared to the risks they face under current system? 2) What are the potential rewards? and 3) What happens at retirement to workers whose privatized risks turn out badly? For workers, privatization would mean smaller Social Security checks, in addition to increased compensation from returns on investments, according to historical precedent. Debate has ensued over the advisability of subjecting workers' retirement money to market risks.
A technical economic argument for privatization is that, without it, the payroll taxes that support Social Security constitute a tax wedge that reduces the supply of labor, like other tax financed government welfare programs. Liberal economists like Peter Orszag
Peter Ország
Peter Ország is a Slovak ice hockey referee, who referees in the Slovak Extraliga.-Career:He has officiated many international tournaments including the Winter Olympics. He has been named Slovak referee of the year....
and Joseph Stiglitz have argued that Social Security is already perceived as enough of a forced savings program to preclude a reduction in the labor supply. Richard Disney has agreed with this reply, noting that
To the extent that pension contributions are perceived as giving individuals rights to future pensions, the behavioral reaction of program participants to contributions will differ from their reactions to other taxes. In fact, they might regard pension contributions as providing an opportunity for retirement saving, in which case contributions should not be deducted [by economists] from household’s earnings and should not be included in the tax wedge.
Privatization advocates nonetheless do not believe that social security taxes will be sufficiently regarded as pension contributions as long as they remain legally structured as taxes (as opposed to being contributions to their own private pensions).
To the extent that pension contributions are perceived as giving individuals rights to future pensions, the behavioral reaction of program participants to contributions will differ from their reactions to other taxes. In fact, they might regard pension contributions as providing an opportunity for retirement saving, in which case contributions should not be deducted from household’s earnings and should not be included in the tax wedge.
Supporters of the current system maintain that its combination of low risks and low management costs, along with its social insurance provisions, work well for what the system was designed to provide: a baseline income for citizens derived from savings. From their perspective, the major deficiency of any privatization scheme is risk. Like any private investments, PRAs could fail to produce any return or could produce a lower return than proponents of privatization assert, and could even suffer a reduction in principal.
Advocates of privatization have long criticized Social Security for lower returns than the returns available from other investments, and cite numbers based on historical performance. The Heritage Foundation
Heritage Foundation
The Heritage Foundation is a conservative American think tank based in Washington, D.C. Heritage's stated mission is to "formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong...
, a conservative
Conservatism
Conservatism is a political and social philosophy that promotes the maintenance of traditional institutions and supports, at the most, minimal and gradual change in society. Some conservatives seek to preserve things as they are, emphasizing stability and continuity, while others oppose modernism...
think tank, calculates that a 40-year-old male with an income just under $60,000, will contribute $284,360 in payroll taxes to the Social Security trust fund over his working life, and can expect to receive $2,208 per month in return under the current program. They claim that the same 40-year-old male, investing the same $284,360 equally weighted into treasuries and high-grade corporate bonds over his working life, would own a PRA at retirement worth $904,982 which would pay an annuity of up to $7,372 per month (assuming that the dollar volume of such investments would not dilute yields so that they are lower than averages from a period in which no such dilution occurred.) Furthermore, they argue that the "efficiency" of the system should be measured not by costs as a percent of assets, but by returns after expenses (e.g. a 6% return reduced by 2% expenses would be preferable to a 3% return reduced by 1% expenses). Other advocates state that because privatization would increase the wealth of Social Security users, it would contribute to consumer spending, which in turn would cause economic growth.
Supporters of the current system argue that the long-term trend of U.S. securities markets cannot safely be extrapolated forward, because stock prices relative to earnings are already at very high levels by historical standards. They add that an exclusive focus on long-term trends would ignore the increased risks they think privatization would cause. The general upward trend has been punctuated by severe downturns. Critics of privatization point out that workers attempting to retire during any future such downturns, even if they prove to be temporary, will be placed at a severe disadvantage.
Proponents argue that a privatized system would open up new funds for investment in the economy, and would produce real growth. They claim that the treasuries held in the current trust fund are covering consumption rather than investments, and that their value rests solely upon the continued ability of the U.S. government to impose taxes. Michael Kinsley
Michael Kinsley
Michael Kinsley is an American political journalist, commentator, television host, and pundit. Primarily active in print media as both a writer and editor, he also became known to television audiences as a co-host on Crossfire...
has said that there would be no net new funds for investment, because any money diverted into private accounts would produce a dollar-for-dollar increase in the federal government's borrowing from other sources to cover its general deficit.
Meanwhile, some investment-minded observers among those who do not support privatization, point out potential pitfalls to the trust fund's undiversified portfolio, containing only treasuries. Many of these support the government itself investing the trust fund into other securities, to help boost the system's overall soundness through diversification
Diversification (finance)
In finance, diversification means reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted average risk of its constituent assets, and often less risk than the least risky of...
, in a plan similar to CalPERS
CalPERS
The California Public Employees' Retirement System or CalPERS is an agency in the California executive branch that "manages pension and health benefits for more than 1.6 million California public employees, retirees, and their families"...
in the state of California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
. Among the proponents of this idea were some members of President Bill Clinton
Bill Clinton
William Jefferson "Bill" Clinton is an American politician who served as the 42nd President of the United States from 1993 to 2001. Inaugurated at age 46, he was the third-youngest president. He took office at the end of the Cold War, and was the first president of the baby boomer generation...
's 1996 Social Security commission that studied the issue; the majority of the group supported partial privatization, and other members put forth the idea that Social Security funds should themselves be invested in the private markets to gain a higher rate of return.
Another criticism of privatization is that while it might theoretically relieve the government of financial responsibility, in practice for every winner from moving risk from the collective to the individual there will be a loser, and the government will be held politically responsible for preventing those losers from slipping into poverty
Poverty
Poverty is the lack of a certain amount of material possessions or money. Absolute poverty or destitution is inability to afford basic human needs, which commonly includes clean and fresh water, nutrition, health care, education, clothing and shelter. About 1.7 billion people are estimated to live...
. Proponents of the current system suspect that for the individuals whose risks turn out badly, these same individuals will support political action to raise state benefits, such that the risks such individuals may be willing to take under a privatized system are not without moral hazard
Moral hazard
In economic theory, moral hazard refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.Moral hazard...
.
Role of government
There are also substantive issues that do not involve economicsEconomics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, but rather the role of government. Conservative Nobel Prize
Nobel Prize
The Nobel Prizes are annual international awards bestowed by Scandinavian committees in recognition of cultural and scientific advances. The will of the Swedish chemist Alfred Nobel, the inventor of dynamite, established the prizes in 1895...
-winning economist
Economist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
Gary S. Becker, currently a graduate professor at the University of Chicago
University of Chicago
The University of Chicago is a private research university in Chicago, Illinois, USA. It was founded by the American Baptist Education Society with a donation from oil magnate and philanthropist John D. Rockefeller and incorporated in 1890...
, wrote in a February 15, 2005 article that "[privatization] reduce[s] the role of government in determining retirement ages and incomes, and improve[s] government accounting of revenues and spending obligations." He compares the privatization of Social Security to the privatization of the steel
Steel
Steel is an alloy that consists mostly of iron and has a carbon content between 0.2% and 2.1% by weight, depending on the grade. Carbon is the most common alloying material for iron, but various other alloying elements are used, such as manganese, chromium, vanadium, and tungsten...
industry, citing similar "excellent reasons."
Management costs of private funds
Opponents of privatization also decry the increased management costs that any privatized system will incur. Dishonest schemes can be sold to naive buyers in which pension values are bled through fees and commissions such as happened in the UK in 1988-1993.Since the U.S. system is passively managed — with no specific funds being tied to specific investments within individual accounts, and with the system's surpluses being automatically invested only in treasuries — its management costs are very low.
Advocates of privatization at the Cato Institute
Cato Institute
The Cato Institute is a libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Edward H. Crane, who remains president and CEO, and Charles Koch, chairman of the board and chief executive officer of the conglomerate Koch Industries, Inc., the largest privately held...
, a libertarian
Libertarianism
Libertarianism, in the strictest sense, is the political philosophy that holds individual liberty as the basic moral principle of society. In the broadest sense, it is any political philosophy which approximates this view...
think tank, counter that, "Based on existing private pension plans, it appears reasonable to assume that the costs of administering a well-run system of PRAs might be anywhere from a low of roughly 15 basis points (0.15%) to a high of roughly 50 basis points (0.5%)." They also point to the low costs of index fund
Index fund
An index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions.-Tracking:Tracking can be achieved by trying to hold all of the...
s (funds whose value rises or falls according to a particular financial index), including an S&P 500
S&P 500
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock...
index fund whose management fees run between 8 basis point (0.08%) and 10 basis points (0.10%).
Windfall for Wall Street?
Opponents also claim that privatization will bring a windfall for Wall StreetWall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...
brokerages and mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
companies, who will rake in billions of dollars in management fees.
Austan Goolsbee
Austan Goolsbee
Austan Dean Goolsbee is an American economist, formerly serving as the Chairman of the Council of Economic Advisers and the youngest member of the cabinet of President Barack Obama. Goolsbee is from the University of Chicago where he is the Robert P...
at the University of Chicago
University of Chicago
The University of Chicago is a private research university in Chicago, Illinois, USA. It was founded by the American Baptist Education Society with a donation from oil magnate and philanthropist John D. Rockefeller and incorporated in 1890...
has written a study, "The Fees of Private Accounts and the Impact of Social Security Privatization on Financial Managers", which calculates that, "Under Plan II of the President's Commission to Strengthen Social Security (CSSS), the net present value (NPV) of such payments would be $940 billion", and, "amounts to about one-quarter (25%) of the NPV of the revenue of the entire financial sector for the next 75 years", and concludes that, "The fees would be the largest windfall gain in American financial history." The Heritage Foundation has produced their own study, written by David C. John, specifically to counter Goolsbee.
Other analysts argue that dangers of a Wall Street windfall of such magnitude are being vastly overstated. Rob Mills, vice-president of the brokerage industry trade group Securities Industry Association
Securities Industry Association
The Securities Industry Association was an association of firms and people who handle securities . In 2006 it merged with the Bond Market Association to form the Securities Industry and Financial Markets Association....
, calculated in a report published in December 2004 that the proposed private accounts might generate $39 billion in fees, in NPV terms, over the next 75 years. This amount would represent only 1.2% of the sector's projected NPV revenues of $3.3 trillion over that timeframe. He concludes that privatization is "hardly likely to be a bonanza for Wall Street." At the same time, the watchdogs at FactCheck
FactCheck
FactCheck.org is a non-partisan, nonprofit website that describes itself as a consumer advocate' for voters that aims to reduce the level of deception and confusion in U.S. politics." It is a project of the Annenberg Public Policy Center of the Annenberg School for Communication at the University...
estimate that the financial management sector will receive only 0.05% and 0.27% of its total revenues from fees on PRAs (personal retirement accounts).
Other privatization proposals
A range of other proposals have been suggested for partial privatization, such as the 7.65% Solution. One, suggested by a number of RepublicanRepublican Party (United States)
The Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the GOP . The party's platform generally reflects American conservatism in the U.S...
candidates during the 2000 elections, would set aside an initially small but increasing percentage of each worker's payroll tax into a 'lockbox', which the worker would be allowed to invest in securities. Another eliminated the Social Security payroll tax completely for workers born after a certain date, and allowed workers of different ages different periods of time during which they could opt to not pay the payroll tax, in exchange for a proportional delay in their receipt of payouts.
Most state pension plans invest a portion of employer and employee contributions in a mixture of stocks, bonds, real estate, etc., which they or professional fund managers invest on behalf of the employees, without creating individual investment accounts.
George W. Bush's privatization proposal
President George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
discussed the "partial privatization" of Social Security since the beginning of his presidency in 2001. But only after winning re-election in 2004 did he begin to invest his "political capital
Political capital
Political capital is primarily based on a public figure's favorable image among the populace and among other important factors in or out of the government. Political capital is essentially the opinion of another person, group of people, or nation about you, your organization, or your government...
" in pursuing changes in earnest.
In May 2001, he announced establishment of a 16-member bipartisan commission "to study and report specific recommendations to preserve Social Security for seniors while building wealth for younger Americans", with the specific directive that it consider only how to incorporate "individually controlled, voluntary personal retirement accounts". The majority of members serving on Bill Clinton
Bill Clinton
William Jefferson "Bill" Clinton is an American politician who served as the 42nd President of the United States from 1993 to 2001. Inaugurated at age 46, he was the third-youngest president. He took office at the end of the Cold War, and was the first president of the baby boomer generation...
's similar Social Security commission in 1996 had recommended through their own report that partial privatization be implemented. Bush's Commission to Strengthen Social Security (CSSS) issued a report in December 2001 (revised in March 2002), which proposed three alternative plans for partial privatization:
- Plan I: Up to two percent of taxable wages could be diverted from FICA and voluntarily placed by workers into private accounts for investment in stocks, bonds, and/or mutual funds.
- Plan II: Up to four percent of taxable wages, up to a maximum of $1000, could be diverted from FICA and voluntarily placed by workers into private accounts for investment.
- Plan III: One percent of wages on top of FICA, and 2.5% diverted from FICA up to a maximum of $1000, could be voluntarily placed by workers into private accounts for investment.
On February 2, 2005, Bush made Social Security a prominent theme of his State of the Union Address
State of the Union Address
The State of the Union is an annual address presented by the President of the United States to the United States Congress. The address not only reports on the condition of the nation but also allows the president to outline his legislative agenda and his national priorities.The practice arises...
. In this speech, which sparked the debate, it was Plan II of CSSS's report that Bush outlined as the starting point for changes in Social Security. He outlined, in general terms, a proposal based on partial privatization. After a phase-in period, workers currently less than 55 years old would have the option to set aside four percentage points of their payroll taxes in individual accounts that could be invested in the private sector, in "a conservative mix of bonds and stock funds". Workers making such a choice might receive larger or smaller benefits than if they had not done so, depending on the performance of the investments they selected.
Although Bush described the Social Security system as "headed for bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
", his proposal would not affect the projected shortfall in Social Security tax receipts. Partial privatization would mean that some workers would pay less into the system's general fund and receive less back from it. Administration officials said that the proposal would have a "net neutral effect" on the system's financial situation, and that Bush would discuss with Congress how to fill the projected shortfall. The Congressional Budget Office
Congressional Budget Office
The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....
had previously analyzed the commission's "Plan II" (the plan most similar to Bush's proposal) and had concluded that the individual accounts would have little or no overall effect on the system's solvency, and that virtually all the savings would come instead from changing the benefits formula.
As illustrated by the CBO analysis, one possible approach to the shortfall would be benefit cuts that would affect all retirees, not just those choosing the private accounts. Bush alluded to this option, mentioning some suggestions that he linked to various former Democratic officeholders. He did not endorse any specific benefit cuts himself, however. He said only, "All these ideas are on the table." He expressed his opposition to any increase in Social Security taxes. Later that month, his press secretary, Scott McClellan
Scott McClellan
Scott McClellan is a former White House Press Secretary for President George W. Bush, and author of a controversial No. 1 New York Times bestseller about the Bush Administration titled What Happened. He replaced Ari Fleischer as press secretary in July 2003 and served until May 10, 2006...
, ambiguously characterized raising or eliminating the cap on income subject to the tax as a tax increase that Bush would oppose.
In his speech, Bush did not address the issue of how the system would continue to provide benefits for current and near-future retirees if some of the incoming Social Security tax receipts were to be diverted into private accounts. A few days later, however, Vice-President
Vice President of the United States
The Vice President of the United States is the holder of a public office created by the United States Constitution. The Vice President, together with the President of the United States, is indirectly elected by the people, through the Electoral College, to a four-year term...
Dick Cheney
Dick Cheney
Richard Bruce "Dick" Cheney served as the 46th Vice President of the United States , under George W. Bush....
stated that the plan would require borrowing $758 billion over the period 2005 to 2014; that estimate has been criticized as being unrealistically low.
On April 28, 2005, Bush held a televised press conference at which he provided additional detail about the proposal he favored. For the first time, he endorsed reducing the benefits that some retirees would receive. He endorsed a plan from Robert Pozen
Robert Pozen
Robert C. Pozen is an American financial executive with a strong interest in public policy. He is the former chairman of MFS Investment Management, the oldest mutual fund company in the United States...
, described below in the section regarding suggestions for Social Security that do not involve privatization.
Although Bush's State of the Union speech left many important aspects of his proposal unspecified, debate began on the basis of the broad outline he had given.
Politics of the dispute over Bush's proposal
The political heat was turned up on the issue since Bush mentioned changing Social Security during the 2004 elections, and since he made it clear in his nationally televised January 2005 speech that he intended to work to partially privatize the system during his second term.To assist the effort, Republican
Republican Party (United States)
The Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the GOP . The party's platform generally reflects American conservatism in the U.S...
donors were asked after the election to help raise $50 million or more for a campaign in support of the proposal, with contributions expected from such sources as the conservative Club for Growth
Club for Growth
The Club for Growth is a politically conservative 527 organization active in the United States of America, with an agenda focussed on taxation and other economic issues, and with an affiliated political action committee . The Club advocates lower taxes, limited government, less government spending,...
and the securities industry. In 1983, a Cato Institute paper had noted that privatization would require "mobilizing the various coalitions that stand to benefit from the change, ... the business community, and financial institutions in particular ..." Soon after Bush's State of the Union speech, the Club for Growth began running television advertisements in the districts of Republican members of Congress whom it identified as undecided on the issue.
A group backed by labor unions called "Americans United to Protect Social Security" "set its sights on killing Bush's privatization plan and silencing his warnings that Social Security was 'headed toward bankruptcy.'"
On January 16, 2005, the New York Times reported internal Social Security Administration documents directing employees to disseminate the message that "Social Security's long-term financing problems are serious and need to be addressed soon", and to "insert solvency messages in all Social Security publications".
Coming soon after the disclosure of government payments to commentator Armstrong Williams
Armstrong Williams
Armstrong Williams is an African American political commentator, author of a conservative newspaper column, and host of a daily radio show and a nationally syndicated TV program, called The Right Side with Armstrong Williams. From 2004 to 2007, he co-hosted a daily radio program with Sam...
to promote the No Child Left Behind Act
No Child Left Behind Act
The No Child Left Behind Act of 2001 is a United States Act of Congress concerning the education of children in public schools.NCLB was originally proposed by the administration of George W. Bush immediately after he took office...
, the revelation prompted the objection from Dana C. Duggins, a vice president of the Social Security Council of the American Federation of Government Employees
American Federation of Government Employees
The American Federation of Government Employees is an American labor union representing over 625,000 employees of the federal government, about 5,000 employees of the District of Columbia, and a few hundred private sector employees, mostly in and around federal facilities...
, that "Trust fund dollars should not be used to promote a political agenda."
In the weeks following his State of the Union speech, Bush devoted considerable time and energy to campaigning for privatization. He held "town meetings" at many locations around the country. Attendance at these meetings was controlled to ensure that the crowds would be supportive of Bush's plan. In Denver
Denver, Colorado
The City and County of Denver is the capital and the most populous city of the U.S. state of Colorado. Denver is a consolidated city-county, located in the South Platte River Valley on the western edge of the High Plains just east of the Front Range of the Rocky Mountains...
, for example, three people who had obtained tickets through Representative Bob Beauprez
Bob Beauprez
Robert L. "Bob" Beauprez is an American politician who was a Republican member of the United States House of Representatives, representing the 7th Congressional District of Colorado....
, a Republican, were nevertheless ejected from the meeting before Bush appeared, because they had arrived at the event in a car with a bumper sticker reading "No More Blood for Oil".
Opponents of Bush's plan have analogized his dire predictions about Social Security to similar statements that he made to muster support for the 2003 Invasion of Iraq
2003 invasion of Iraq
The 2003 invasion of Iraq , was the start of the conflict known as the Iraq War, or Operation Iraqi Freedom, in which a combined force of troops from the United States, the United Kingdom, Australia and Poland invaded Iraq and toppled the regime of Saddam Hussein in 21 days of major combat operations...
.
A dispute between the AARP
AARP
AARP, formerly the American Association of Retired Persons, is the United States-based non-governmental organization and interest group, founded in 1958 by Ethel Percy Andrus, PhD, a retired educator from California, and based in Washington, D.C. According to its mission statement, it is "a...
and a conservative
Conservatism
Conservatism is a political and social philosophy that promotes the maintenance of traditional institutions and supports, at the most, minimal and gradual change in society. Some conservatives seek to preserve things as they are, emphasizing stability and continuity, while others oppose modernism...
group for older Americans, USA Next
USA Next
USA Next , formerly known as the United Seniors Association, is a United States lobbyist group whose slogan is "Building a Legacy of Freedom for America's Families". It presents itself as a conservative senior citizens|old people' organization. The group is a 501 organization...
, cropped up around the time of the State of the Union speech. The AARP had supported Bush's plan for major changes in Medicare
Medicare (United States)
Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...
in 2003, but it opposed his Social Security privatization initiative. In January 2005, before the State of the Union Address, the AARP ran advertisements attacking the idea. In response, USA Next launched a campaign against AARP. Charlie Jarvis of USA Next stated: "They [AARP] are the boulder in the middle of the highway to personal savings accounts. We will be the dynamite that removes them."
The tone of the debate between these two interest groups is merely one example among many of the tone of many of the debates, discussions, columns, advertisements, articles, letters, and white papers that Bush's proposal, to touch the "third rail", has sparked among politicians, pundits, thinktankers, and taxpayers.
Immediately after Bush's State of the Union speech, a national poll brought some good news for each side of the controversy. Only 17% of the respondents thought the Social Security system was "in a state of crisis", but 55% thought it had "major problems". The general idea of allowing private investments was favored by 40% and opposed by 55%. Specific proposals that received more support than opposition (in each case by about a two-to-one ratio) were "Limiting benefits for wealthy retirees" and "Requiring higher income workers to pay Social Security taxes on ALL of their wages". The poll was conducted by USA Today
USA Today
USA Today is a national American daily newspaper published by the Gannett Company. It was founded by Al Neuharth. The newspaper vies with The Wall Street Journal for the position of having the widest circulation of any newspaper in the United States, something it previously held since 2003...
, CNN
CNN
Cable News Network is a U.S. cable news channel founded in 1980 by Ted Turner. Upon its launch, CNN was the first channel to provide 24-hour television news coverage, and the first all-news television channel in the United States...
, and the Gallup Organization.
Bush's April press conference, in which for the first time he expressly endorsed benefit reductions, sparked disagreement about where the burden would fall. Bush referred to "people who are better off". Many media summaries accepted the characterization that "wealthy" retirees would be affected, and that benefits for lower-income people would grow. Opponents countered that middle-class retirees would also experience cuts, and that those below the poverty line would receive only what they are entitled to under current law. Democrats also expressed concern that a Social Security system that primarily benefited the poor would have less widespread political support. Finally, the issue of private accounts continued to be a divisive one. Many legislators remained opposed or dubious, while Bush, in his press conference, said he felt strongly about the point.
Despite Bush's emphasis on the issue, many Republicans in Congress were not enthusiastic about his proposal, and Democrats were unanimously opposed. In late May 2005, House Majority Whip Roy Blunt
Roy Blunt
Roy D. Blunt is the junior United States Senator from Missouri. He is a member of the Republican Party. His Senate seat was previously held by Republican Kit Bond, until his retirement....
listed the "priority legislation" to be acted on after Memorial Day
Memorial Day
Memorial Day is a United States federal holiday observed on the last Monday of May. Formerly known as Decoration Day, it originated after the American Civil War to commemorate the fallen Union soldiers of the Civil War...
; Social Security was not included, and Bush's proposal was considered by many to be dead. In September, some Congressional Republicans pointed to the budgetary problems caused by Hurricane Katrina
Hurricane Katrina
Hurricane Katrina of the 2005 Atlantic hurricane season was a powerful Atlantic hurricane. It is the costliest natural disaster, as well as one of the five deadliest hurricanes, in the history of the United States. Among recorded Atlantic hurricanes, it was the sixth strongest overall...
as a further obstacle to acting on the Bush proposal. Congress did not enact any major changes to Social Security in 2005, or before its pre-election adjournment in 2006.
During the campaigning for the 2006 midterm election
United States general elections, 2006
The 2006 United States midterm elections were held on Tuesday, November 7, 2006. All United States House of Representatives seats and one third of the United States Senate seats were contested in this election, as well as 36 state governorships, many state legislatures, four territorial...
, Bush stated that reviving his proposal for privatizing Social Security would be one of his top two priorities for his last two years in office. In 2007, he continued to pursue that goal by nominating Andrew Biggs, a privatization advocate and former researcher for the Cato Institute, to be deputy commissioner of the Social Security Administration. When the Senate did not confirm Biggs, Bush made a recess appointment
Recess appointment
A recess appointment is the appointment, by the President of the United States, of a senior federal official while the U.S. Senate is in recess. The U.S. Constitution requires that the most senior federal officers must be confirmed by the Senate before assuming office, but while the Senate is in...
, enabling Biggs to hold the post without Senate confirmation until December 2008. During his last days in office, Bush said that spurring the debate on Social Security was his most effective achievement during his presidency.
Other concerns
Some allege that George W. BushGeorge W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
is opposed to Social Security on ideological grounds, regarding it as a form of governmental redistribution of income from the wealthy, which other groups such as libertarians strongly oppose. Some of the critics of Bush's plan argued that its real purpose was not to save the current Social Security system, but to lay the groundwork for dismantling it. They note that, in 2000, when Bush was asked about a possible transition to a fully privatized system, he replied: "It's going to take a while to transition to a system where personal savings accounts are the predominant part of the investment vehicle. ... This is a step toward a completely different world, and an important step." His comment is consonant with the Cato Institute
Cato Institute
The Cato Institute is a libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Edward H. Crane, who remains president and CEO, and Charles Koch, chairman of the board and chief executive officer of the conglomerate Koch Industries, Inc., the largest privately held...
's reference in 1983 to a "Leninist
Vladimir Lenin
Vladimir Ilyich Lenin was a Russian Marxist revolutionary and communist politician who led the October Revolution of 1917. As leader of the Bolsheviks, he headed the Soviet state during its initial years , as it fought to establish control of Russia in the Russian Civil War and worked to create a...
strategy" for "guerrilla warfare
Guerrilla warfare
Guerrilla warfare is a form of irregular warfare and refers to conflicts in which a small group of combatants including, but not limited to, armed civilians use military tactics, such as ambushes, sabotage, raids, the element of surprise, and extraordinary mobility to harass a larger and...
" against both the current Social Security system and the coalition that supports it."
Critics of the system, such as Nobel Laureate economist
Economist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
, have said that Social Security redistributes wealth from the poor to the wealthy. http://www.ideachannel.tv/ Workers must pay 12.4%, including a 6.2% employer contribution, on their wages below the Social Security Wage Base
Social Security Wage Base
For the Old Age, Survivors and Disability Insurance tax or Social Security tax, the Social Security Wage Base is the maximum earned gross income or upper threshold on which a wage earner's Social Security tax may be imposed...
($102,000 in 2008), but no tax on income in excess of this amount. Therefore, high earners pay a lower percentage of their total income, resulting in a regressive tax
Regressive tax
A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the...
. The benefit paid to each worker is also calculated using the wage base on which the tax was paid. Changing the system to tax all earnings without increasing the benefit wage base would result in the system being a progressive tax
Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
.
Furthermore, wealthier individuals generally have higher life expectancies and thus may expect to receive larger benefits for a longer period than poorer taxpayers, often minorities. A single individual who dies before age 62, who is more likely to be poor, receives no retirement benefits despite years of paying Social Security tax. On the other hand, an individual who lives to age 100, who is more likely to be wealthy, is guaranteed payments that are more than he or she paid into the system.
A factor working against wealthier individuals and in favor of the poor with little other retirement income is that Social Security benefits become subject to federal income tax based on income. The portion varies with income level, 50% at $32,000 rising to 85% at $44,000 for married couples in 2008. This does not just affect those that continue to work after retirement. Unearned income withdrawn from tax deferred retirement accounts, like IRAs
Individual Retirement Account
An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
and 401(k)
401(k)
A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
s, counts towards taxation of benefits.
Still other critics focus on the quality of life issues associated with Social Security, claiming that while the system has provided for retiree pensions, their quality of life is much lower than it would be if the system were required to pay a fair rate of return. The party leadership on both sides of the aisle have chosen not to frame the debate in this manner, presumably because of the unpleasantness involved in arguing that current retirees would have a much higher quality of life if Social Security legislation mandated returns that were merely similar to the interest rate the U.S. government pays on its borrowings.
Effects of the gift to the first generation
It has been argued that the first generation of social security participants have, in effect, received a large gift, because they received far more benefits than they paid into the system. Robert J. Shiller noted that "the initial designers of the Social Security System in 1935 had envisioned the building of a large trust fund", but "the 1939 amendments and subsequent changes prevented this from happening".As such, the gift to the first generation is necessarily borne by subsequent generations. In this pay-as-you-go system, current workers are paying the benefits of the previous generation, instead of investing for their own retirement, and therefore, attempts at privatizing Social Security could result in workers having to pay twice: once to fund the benefits of current retirees, and a second time to fund their own retirement.
Pyramid or Ponzi scheme claims
Critics have noted that the funding mechanism of an illegal Ponzi schemePonzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
, where early "investors" are paid off out of the funds collected from later investors instead of out of profits from business activity, has similarities with Social Security's pay-as-you-go funding mechanism, in particular a sustainability problem when there is a declining number of new paying entrants.
William G. Shipman of the Cato Institute
Cato Institute
The Cato Institute is a libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Edward H. Crane, who remains president and CEO, and Charles Koch, chairman of the board and chief executive officer of the conglomerate Koch Industries, Inc., the largest privately held...
argues:
In common usage a trust fund is an estate of money and securities held in trust for its beneficiaries. The Social Security Trust Fund is quite different. It is an accounting of the difference between tax and benefit flows. When taxes exceed benefits, the federal government lends itself the excess in return for an interest-paying bond, an IOUIOU (debt)An IOU is usually an informal document acknowledging debt. An IOU differs from a promissory note in that an IOU is not a negotiable instrument and does not specify repayment terms such as the time of repayment. IOUs usually specify the debtor, the amount owed, and sometimes the creditor...
that it issues to itself. The government then spends its new funds on unrelated projects such as bridge repairs, defense, or food stamps. The funds are not invested for the benefit of present or future retirees.
Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
has also echoed this 'Ponzi Scheme' allegation. Commenting on the redistributionary nature of Social Security, Krugman once wrote "Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today's young may well get less than they put in)."
This criticism is not new. In his 1936 presidential campaign, Republican Alf Landon
Alf Landon
Alfred Mossman "Alf" Landon was an American Republican politician, who served as the 26th Governor of Kansas from 1933–1937. He was best known for being the Republican Party's nominee for President of the United States, defeated in a landslide by Franklin D...
called the trust fund "a cruel hoax". The Republican platform that year stated, "The so-called reserve fund estimated at forty-seven billion dollars for old age insurance is no reserve at all, because the fund will contain nothing but the Government's promise to pay, while the taxes collected in the guise of premiums will be wasted by the Government in reckless and extravagant political schemes."
The Baby Boomer demographic groups and future demographic groups will be putting as much money via the FICA tax into Social Security as they will be receiving. The generosity of the government to past generations created the projected Social Security deficits. (The kindness of the government to past generations in part was because of the recognition to mothers, as mothers gave up their children to serve and oftentimes die in defense of the country.)
The Social Security Administration responds to the criticism as follows:
See also
- Generational accountingGenerational accountingGenerational accounting is a relatively new method of national accounting for measuring redistribution of lifetime tax burdens across generations from social insurance, including social security and social health insurance...
- Pensions crisisPensions crisisThe pensions crisis is a predicted difficulty in paying for corporate, state and federal pensions in the U.S. and Europe, due to a difference between pension obligations and the resources set aside to fund them. Shifting demographics are causing a lower ratio of workers per retiree, while retirees...
- List of Social Security legislation (United States)
- Social Security (United States)Social Security (United States)In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...
for both information about the program, as it currently exists, and historical information about the creation of the program in the mid 1930's and the controversies at that time. - Welfare's effect on povertyWelfare's effect on povertyThe effect of social welfare on poverty is controversial. Since the goal of welfare programs is to reduce poverty, it has been debated, primarily in the United States, whether or not welfare programs achieve this goal....
Further reading
Interactive graphics
Articles
- Be not afraid: personal accounts are no radical idea — The American Enterprise — March 2005
- CommUnity of Minds: Working Together — The $44 Trillion Abyss - 2003 Fortune Magazine
- "False Attacks Over 'Windfalls' to Wall Street" — from FactCheckFactCheckFactCheck.org is a non-partisan, nonprofit website that describes itself as a consumer advocate' for voters that aims to reduce the level of deception and confusion in U.S. politics." It is a project of the Annenberg Public Policy Center of the Annenberg School for Communication at the University...
* José Piñera, "Retiring in Chile", The New York TimesThe New York TimesThe New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...
, December 1, 2004 - Retiring in Chile
- José Piñera, "Empowering the Workers: The Privatization of Social Security in Chile" - Cato Journal, Vol. 15 No. 2-3
- Getting a grip on Social Security: The flaw in the system
- Social Security Suicide at AlterNet
- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=976586Arno Tausch (2005) ‚World Bank Pension reforms and development patterns in the world system and in the “Wider Europe”. A 109 country investigation based on 33 indicators of economic growth, and human, social and ecological well-being, and a European regional case study’. A slightly re-worked version of a paper, originally presented to the Conference on “Reforming European pension systems. In memory of Professor Franco ModiglianiFranco ModiglianiFranco Modigliani was an Italian economist at the MIT Sloan School of Management and MIT Department of Economics, and winner of the Nobel Memorial Prize in Economics in 1985.-Life and career:...
. 24 and 25 September 2004", Castle of Schengen, Luxembourg Institute for European and International Studies] - "The Fake Crisis" — Rolling StoneRolling StoneRolling Stone is a US-based magazine devoted to music, liberal politics, and popular culture that is published every two weeks. Rolling Stone was founded in San Francisco in 1967 by Jann Wenner and music critic Ralph J...
- US Government Accountability Office, Social Security Reform: Answers to Key Questions
- "What Does Price Indexing Mean for Social Security Benefits?" — from Center for Retirement Research, January, 2005 (explanation of wage indexing versus price indexing)
- Social Security Q & A by economist Doug Orr
- Washington Post - Allan Sloan - The Next Great Bailout: Social Security -July 2009
- Center on Budget and Policy Priorities - Policy Basics: Top Ten Facts about Social Security on the Program's 75th Anniversary
Speeches
- President George W. Bush — State of the Union Address — February 2, 2005
- "Bush's State of the Union: Social Security 'Bankruptcy?'" — FactCheck.org commentary on the speech
- FRB: Testimony, Greenspan — Economic outlook and current fiscal issues — February 25, 2004
- Social Security Under Attack: Cuts Proposed, Higher Retirement Age Suggested - video report by Democracy Now!Democracy Now!Democracy Now! and its staff have received several journalism awards, including the Gracie Award from American Women in Radio & Television; the George Polk Award for its 1998 radio documentary Drilling and Killing: Chevron and Nigeria's Oil Dictatorship, on the Chevron Corporation and the deaths of...