Social Security

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Social Security is a compulsory social insurance program primarily for old people and the disabled, sponsored by the U.S. federal government. It is strongly endorsed by all major conservative politicians in recent decades, and was expanded by presidents George W. Bush and Dwight D. Eisenhower, and put on a stable financial basis by Ronald Reagan. Social Security includes Medicare, starting in 1965, which covers medical costs of beneficiaries.

Social Security is part of the welfare state, but it is not considered a welfare program because the beneficiaries have paid into it all their working lives.

Social security programs were first introduced by conservatives and pro-business politicians, such as Otto von Bismark in Germany and Winston Churchill in Britain, in order to weaken Socialism. All developed countries have a system somewhat similar to the U.S.

Contents

History

In 1889 Germany was the first country to introduce government pension plans. Britain introduced its program in 1907.

United States

Social Security was founded as a quick-fix solution to unemployment by paying off older workers to give up their jobs for younger workers. No net new jobs were created. Economists call this a zero-sum game, where net gains and losses are exactly balanced. The payment system mimicks the idea of insurance premiums with payments withheld from a workers paycheck. None of the premiums, however, have ever been invested in a so-called "Trust fund," and are actually diverted into a "pay as you go" (or "paygo") system destined for immediate aggregate consumption expenditures. Hence many of the structural flaws date from the programs' origins.

Payments are based on a percentage of earnings of workers which become an obligation, or debt, of the United States government. The current rates are 15.3% -- half provided by the worker and half paid by the employer, which includes Medicare. No deduction or personal exemption is allowed, meaning the very first dollar of earnings is taxed.

Over the years excess withholdings from workers paychecks, (known as F.I.C.A.), have been used to fund government paygo operations such as the Vietnam War,[1][2][3] for instance. However, overwithholding from workers paychecks will become less of a problem in the near future as the gap is closed between the ratio of workers supporting the system, and those drawing upon the system for sustenance.

With the abject failure of the First New Deal to create any net new private sector jobs, the Social Security Act was passed in 1935 and started operations in 1937. Since benefits required at least 5 years of payments, a special program was included in 1937 to help old people who already were retired and who had high rates of poverty. The program was never intended to be the sole means of support for retirees; in a 1939 message to Congress President Roosevelt said,

We shall make the most orderly progress if we look upon Social Security as a development toward a goal rather than a finished product. We shall make the most lasting progress if we recognize that Social Security can furnish only a base upon which each one of our citizens may build his individual security through his own individual efforts.”[4]

President Franklin Roosevelt's proposal for an overwithholding slush fund

The Social Security Act was drafted by President Franklin Delano Roosevelt's committee on economic security, under Edwin E. Witte, and passed during FDR's first term which provided for workers who reach the age of 65 a pension of $8 a week at most. The plan had to be pushed through against FDR's procrastination until finally in the 1934 congressional elections the Republicans denounced him for his tardiness. When FDR finally consented to a bill, it contained a plan for building a huge reserve fund that would extract billions from the workers' payrolls without any adequate return. Over the protest of the President, the Congress finally took that provision proposed by Roosevelt out of the law. [5]

President Lyndon Johnson raids the Social Security Trust Fund to wage the Vietnam War

President Johnson created the 'unified budget' in the late 1960s to disguise the real cost of the Vietnam War.[6] [7] President Johnson did not want to ask for income tax increases to pay for several ambitious government programs of that era (the Vietnam War, the Great Society War on Poverty, the NASA Space Race). Putting surpluses from Social Security overwithholding “on budget” (adding them to the general operating budget of the United States Government) so the overwithholding could be used to pay for other government programs would make the federal budget appear balanced. The resulting debt to Trust Funds would be presented “off budget.”

In 1967 President Johnson appointed a Commission on Federal Budget Concepts which in its October 1967 report proposed a unified budget to do this. Johnson submitted the first unified budget to a Democratic Congress for Fiscal Year 1969 scheduled to begin on July 1, 1968. Thus was born the practice of using Social Security Trust Fund surpluses – or "Intra-governmental Holdings of Debt" to hide the size of the overall federal deficit.

President Bill Clinton's proposal to Privatize Social Security

Social Security has been called the "third rail of American politics" because politicians get badly burned if they try to tamper with it. In 1999 President Clinton proposed investing the Social Security Trust Fund in what some might consider "risky" assets in the stock market and bonds. The stock market then was in the late stages of a bull market cycle with stock prices and indexes overvalued. Clinton told a joint meeting fo the U.S. House of Representatives and Senate,

I propose that we commit 60 percent of the budget surplus for the next 15 years to Social Security, investing a small portion in the private sector, just as any private or State Government pension would do.[8]

The Clinton/Gore Tax on Social Security benefits

In 1993 President Clinton sought to increase taxes on Social Security benefits of the elderly and disabled.[9] The final version of the bill passed by the Democratically controlled Congress increased taxes on beneficiaries from the first 50% to 85%[10] of benefits (or "annuity payments" as they were originally called). Vice President Al Gore cast the deciding tie-breaker vote in the Senate to make the tax increase law. The Clinton-Gore tax increase on Social Security benefits included 15% more of the social security benefit at the beneficiary's marginal rate. It collected some taxes on retired couple making as little as $22,000 per year.[11]

In 2009 conservatives attacked the Democrats health care reform program because it reneged on promises made to Medicare beneficiaries.

Social Security and African-Americans

When Social Security was first passed most blacks worked on farms or as domestics and were not covered. Nearly all have left the farms--and the the few remaining domestics are now covered.

The amount of social security benefits received depends on how long one lives after retiring. African-Americans generally have lower life expectancies than other groups. When a black man reaches age 65, he is expected to live only another 13.9 years, almost 2 years (24 payments) less than a white male. The RAND Corporation concluded that, because of differences in life expectancies and marriage rates, on a life-time basis the income transfer from blacks to whites is as much as $10,000 per person. However, blacks aree more likely to receive disability benefits.

African-Americans are much more likely than other groups to be largely dependent on Social Security for retirement income.

The payroll tax

Source of payment Amount of contributions
Social Security contributions by employer 6.2%
Medicare contributions by employer 1.45%
Social Security contribution by worker 6.2%
Medicare contribution by worker 1.45%
Total contributions based on workers Gross earnings 15.3%
Plus other mandated payments of employer varies
Unemployment insurance paid by employer varies by State
Workers Compensation insurance paid by employer varies by occupation and State
Plus other benefits varies
Medical benefits paid by worker and employer varies
Private retirement plans paid by worker and employer varies

There are four component parts that constitute payments to a workers public sector retirement fund, of which the payroll tax paid by workers furnishes only half. Employers are required to pay the other half based on a percentage of the workers gross wages (W-2 income). The employer's share of mandated payments, on behalf of the worker, is not seen in the worker's gross wages, yet the cost is very real. Other factors also weigh on employers ability to give raises, extend overtime, or create new jobs. The amounts withheld and paid to the federal Treasury constitute the largest component of the growing national debt. And since this debt is created by the aggregate total of workers compensation, the more people employed, the more hours they work, the greater the growth of federal obligations that are promised to be repaid in the future. Hence, unlike most debt that is repaid by labor, labor is the source of the national debt. The national debt can never be "paid down" by people working hard and long hours; rather paid labor only adds to the national debt.

Rep. Paul Ryan, Chairman of the House Budget Committee in the 112th Congress, proposed in his Roadmap for America's Future a choice for all workers to be allowed to invest 2 percent of their first $10,000 of annual payroll tax into personal accounts. Workers would be allowed to select from a list of managed investment funds, approved by the government for soundness and safety, like those in the federal government’s Thrift Savings Plan.

Harold Meyerson of the Democratic Socialists of America, writing in the Washington Post proposed eliminating the payroll tax altogether, for both employers and employees, claiming it would increase by $2,100 the take-home pay, and buying power, of workers making $50,000 annually.[12]

Medicare

In 1965, prodded by liberal president Lyndon Johnson, Congress enacted the Medicare program as part of the "Great Society." Medicare revenues operates as part of the Social Security program and reimburses some health care providers for beneficiaries over the age of 65. A Medicaid program was established to provide health care for poor people who can not afford private health insurance.

Present liabilities promised to Baby boomers

Graph: USA Today

The cost of Social Security benefits that were promised to 70 million Americans of the "baby-boom" generation exceeds $53 trillion dollars ($53,000,000,000,000).[13][14][15] To understand the magnitude of this figure by contrast, the World Bank estimates the GDP of the planet (total economic output) for the year 2008 as $61.063 trillion.[16] The sum total of promises made to all working age adults in the U.S population is estimated at over $106 trillion,[17][18] more than one and half times the total annualized economic activity of the planet. An editorial in USA Today claims "Without action, outlays on benefit programs such as Medicare and Social Security, combined with interest on the national debt, are projected to grow so fast that they will devour all tax revenue in as soon as 20 years. That means every government department and agency, except for those that pay benefits and service the debt, could be eliminated — and Washington would still run a deficit."[19]

Reform

Is Social Security experiencing a cash flow crisis?[20] Actuaries say that thanks to the Reagan reforms of 1983, Social Security is fully funded for 75 years. Medicare is much harder to gauge, because no one knows the future rate of growth of medical costs, which have been quite high in recent decades.


In 2005 President Bush proposed a privatization program that would allow people to control their own Social Security accounts, especially by investments in the stock market. He argued that the stock market provided higher rates of return. The proposals got little support and were dropped. The stock market collapse in the Recession of 2008 chilled enthusiasm for similar proposals, and no prominent politician in 2009 is proposing privatization.

In the 2012 Trustees report, the Trustees projected that in a good economy Social Security may be solvent until 2033. They provide less optimistic projections in which the Social Security is unable to pay full benefits in 2027. (http://www.ssa.gov/pressoffice/pr/trustee12-pr.html)

Pros and cons of social security

This is a list of the most common arguments used in favour of, and against social security, some may not apply to American social security, since it is not as extensive as that of other developed nations.

Pros

Safety Net
  • Health benefits for everyone over 65.
  • Cash benefit for the elderly who haven't provided for private retirement plans.
Security
  • Social security decreases extreme poverty, which in turn decreases crime [21].

Cons

  • Individual Empowerment: individuals would have more motivation to work hard and succeed, this may not however apply to some disabled persons and the economy is unpredictable (recessions).
  • Higher Returns and Greater Benefits: even the most conservative investors would accrue substantial assets during their lifetimes through privately invested accounts, which historically have yielded far more than Social Security promises in retirement income.
  • Improved Economy: economists believe that the overall economy will benefit from an increase in savings and investment resulting from this system. Retirement savings provided by workers create jobs, unlike the Social Security pay as you go system destined for immediate aggregate personal consumption expenditures.
  • Some individuals will get "lazy" and choose not to work, only costing society.
  • Economic costs of the program. It is estimated that Social Security will be broke in the early-to-mid 21st century.

France

In September 2010 an estimated one to three million demonstrators took to the streets to protest a government effort to raise the retirement age from 60 to 62.[22]

Greece

In February 2010 Greece announced austerity plans to overhaul its Social Security system in the wake of the Greek Sovereign Debt Crisis.[23]

Spain

Spain has the highest worker-pensioner ratio in the world. Four workers currently contribute 21.3% of thier income to support one Social Security recipient.[24][25] These numbers are particularly alarming given Spanish Unemployment has risen to a record high of 20%[26] after the global Financial Crisis of 2008.

By 2050 the worker-pensioner ratio in Spain is projected to shrink to 1.4 workers for every recipient.[27]

Criticism

Social security has been called a "Ponzi Scheme" that "shifts wealth from private individuals to government."[28] The Social Security tax (aka the payroll tax or the FICA tax - Federal Insurance Contribution Act) has been called a regressive tax by the political left because the effective tax rate decreases as income increases (because there is a taxable maximum).[29] Social Security has also been widely (and wrongly) criticized for contributing to the United States's National Debt even though the Social Security Trust Fund is separate from the Treasury's general funds and the Social Security Trust Fund has actually financed a large portion of the national debt. [30].

The future of Social Security

Each one dollar withheld from workers earnings as FICA tax is one dollar added to the National debt; due to this structural flaw by the founders of Social Security, the U.S. Public Debt can not be paid down by labor.[31]

Social security will face many problems in the 21st century, most notably the aging of the population in developed nations, although more problematic in Europe and especially Japan, will strain American social security budgets [32] In calendar year 2010, Social Security's outlays will exceed tax revenues (that is, the trust funds' receipts excluding interest) for the first time since the enactment of the Social Security Amendments of 1983.[33] According to the Congressional Budget Office, Social Security will exhaust its current sources of revenue completely by 2042 and will be "unable to pay full benefits without changes in law."[34]

Further reading

  • Beland, Daniel. Social Security: History and Politics from the New Deal to the Privatization Debate (2007) excerpt and text search
  • Glenn, Brian J. and Steven M. Teles, eds. Conservatism and American Political Development (2009), two chapters on conservatives andSocial Security issues since 1930s excerpt and text search
  • Shoven, John B. and George P. Shultz. Putting Our House in Order: A Guide to Social Security and Health Care Reform (2008), a conservative analysis excerpt and text search

References

  1. "President Johnson issued a 'unified' federal budget for FY1969. This was done administratively (i.e., not as a result of legislation)." Social Security and the Federal Budget: What Does Social Security’s Being “Off Budget” Mean? Congresasional Research Service, 98-422 EPW, Updated July 23, 1998, p. 20.
  2. The Federal Budget and Stabilization Policy in 1968.
  3. Trust Funds in the Unified Budget, p.3.
  4. A Message Transmitting to Congress a Report of the Social Security Board recommending certain improvements in the Law. January 16, 1939. Retrieved from the Historian’s Office of the Social Security Administration, January 5, 2011.
  5. The Roosevelt Myth, John T. Flynn, Fox and Wilkes, 1948, pp. 67-68, 424-425 pdf.
  6. Federal Fiscal Policy 1965-72, Federal Reserve Bulletin, No. 6 Vol. 59, July 1973.
  7. Sunder, S., Econometrics of fair values, Accounting Horizons 22(1): 111-125.
  8. President Bill Clinotn's 1999 State of the Union Address, January 19, 1999. Retrieved from C-Span.org 19 August 2010.
  9. http://www.house.gov/house/Contract/seniorsd.txt
  10. http://web.archive.org/web/20040408115747/www.ssa.gov/OACT/HOP/hopi.htm
  11. Congressional Record, Comments by Rep. Christopher Cox, July 27, 2000.
  12. http://www.washingtonpost.com/opinions/time-for-another-stimulus-mr-president/2011/08/09/gIQAjwLQ5I_story.html
  13. http://www.usatoday.com/news/nation/2004-10-03-debt-cover_x.htm
  14. http://www.usatoday.com/news/graphics/debtcalculator/flash.htm
  15. http://fiscalsolvency.com/the_3_parts_of_our_fiscal_crisis.htm
  16. http://www.google.com/publicdata?ds=wb-wdi&met=ny_gdp_mktp_cd&idim=country:USA&dl=en&hl=en&q=gdp#met=ny_gdp_mktp_cd&tdim=true See also CIA World Fact Book [1]
  17. http://www.cnbc.com/id/38979552
  18. http://www.forbes.com/2009/05/14/taxes-social-security-opinions-columnists-medicare.html
  19. Our view on government inaction: Gridlock's just another word for lack of leadership, USA Today editorial, November 11, 2010.
  20. Social Security Commissioner, 2006 Social Security Statement
  21. Poverty, Income Inequality, and Violent Crime: A Meta-Analysis of Recent Aggregate Data Studies Ching-Chi Hsieh [2]
  22. http://news.yahoo.com/s/afp/20100923/ts_afp/francestrikepensionpolitics
  23. http://news.ebru.tv/en/Europe/14657.html
  24. http://siteresources.worldbank.org/INTPENSIONS/Resources/395443-1142535808399/2329423-1170369479400/Pensions_in_Aging_Societies_Galasso.pdf
  25. http://spanishinsight.blogspot.com/2010/10/when-will-spanish-pensions-system.html
  26. http://www.google.com/publicdata?ds=z9a8a3sje0h8ii_&met=unemployment_rate&idim=eu_country:ES&dl=en&hl=en&q=spanish+unemployment
  27. http://www.un.org/esa/population/publications/worldageing19502050/
  28. http://www.americanthinker.com/2011/03/the_politics_of_social_securit.html
  29. "Contribution and Benefit Base." Social Security Online. [3]
  30. "The Truth About Who Really Owns All of America's Debt." Business Insider. http://www.businessinsider.com/who-owns-us-debt-2011-7#social-security-trust-fund-17
  31. http://www.treasurydirect.gov/govt/resources/faq/faq_publicdebt.htm#DebtOwner
  32. Will social security and Medicare remain viable as the US population is aging? (pdf) Henning Bohn[4]
  33. Congressional Budget Office, Long-Term Projections for Social Security, October 2010.
  34. Ibid.
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