John J. Burton
January 20, 2005
Rev. March 29, 2006
Social Security
After a flurry of attention last year, Social Security now is a dead issue in
Congress. But the financial program that supports it is slowly weakening.
So at least the younger generation should be aware of the coming problem
and of alternate ways to correct the problem.
The Situation
Ever since the Social Security system was established in 1935, its receipts
each year from employees and employers had been greater than the
amount that is paid out to the elderly. This excess of money has been
accumulated in what is titled “The Social Security Trust Fund.” Each year,
this excess of receipts over payments have been loaned to the U.S.
Treasury, so the Treasury has a clear legal obligation to repay these funds
to the Social Security System when the time comes that the Social Security
System needs it in order to continue its regular payments. And by law,
the Social Security System is obligated to continue these payments—a
promise that has been made to those who have been paying into the
system.
It has been calculated, and there is no disagreement on this point, that
until about the year 2018, the Social Security System will continue to
receive more money each year than it pays out.
The next period to be considered is from about 2018 to about 2042.
During this period, Social Security would need to pay out each year more
than it receives. During this period, the favorable financial situation our
government has been enjoying will be reversed. Instead of Social Security
loan money, which has been used each year to help balance the Federal
Budget, the Treasury will have to each year repay to Social Security
enough of the loan money so that Social Security can continue to make its
payments. Thus the government will have to raise more money by
taxation or allow the Federal deficit to get bigger.
About the year 2042, the situation will again change. At this time, due to
several factors that have arisen since 1935 such as rising longevity and
slower population growth, At present 3.3 workers are paying onto the
system for each retirees receiving its benefits; by 2042 this ratio will be
less than 2 to 1. Social Security income will no longer equal its payment
obligations. But the Social Security system would not be bankrupt as
Bush has proclaimed. It would be able to continue payments but only at
about 70% of the normal rate.
What Can be Done?
There are several ways to avoid this coming shortage of Social Security
funds if our politicians have the courage to do so. But this will be difficult
because all contemplated changes will have strong objection from some
portion of the voters. The following are some actions we could take now to
forestall the 2042 dilemma.
1.We can increase the retirement age by several more years; 70 years has
been suggested. This makes sense because workers are living much
longer than was anticipated in 1935, when the year 65 was established.
And a much bigger proportion of workers are now in less physically
demanding jobs than was the case in 1935. To ease the physical and/or
mental strain on over-65 workers, employers could be made to adjust
working hours and conditions and be allowed to correspondingly reduce
the pay rate of those over 65 to match their lesser workload. In my
opinion, this is an action we should take to alleviate part of the existing
shortfall.
2.We could raise the present salary limits for social security deductions
from its present $90,000 per year. This would affect the 6% of people
whose salary incomes are above $90,000. It has been estimated that
raising this limit to $140,000 per year would take care of ½ of the present
anticipated shortage. In my opinion, we should do this, but I question
whether there should be a $140,000 limit.
3.We could eliminate Social Security payments to those whose income, as
shown by their income tax return, is so high that they clearly do not need
this additional income. The objection that has been raised to this is that
this puts social security payments seen as a form of welfare, but as I view
it, this should be done and seen as an additional tax on the wealthy.
4.The Social Security payments by employees and employers could be
increased as has been done several times already. One estimate is that an
increase of 2% to the present 12.4% payroll tax would take care of the
expected shortfall in 1942. Of course this would be an undesirable burden
on both employers and employees. This increase in the equal amount paid
by employers would discourage companies from hiring, and this increased
tax paid by employees would discourage people from working in jobs
covered by Social Security, thus encouraging moonlighting. My opinion is
that this should not be done.
5.We could increase the rate of return on the Social Security Trust Fund
by having the Trust fund in a manner that would yield a greater return
than is now received by investing it in Treasury bonds. For example
money in the Social Security Trust Fund could be invested in stock market
index funds or corporate bond funds or in a combination of both. Over a
long period of time it is almost certain that this would increase the income
of the Trust Fund. The record of the stock market has been that in spite
of periods of losses, it has over long periods of 40 years or more been a
gain. For the past century it is said that the average annual gain of 9%.
But this would be upsetting to our financial structure in that the Treasury
has always had a Social Security trust fund as one of the buyers of
Treasury bonds. And there is the danger that the purchase of stocks or
stock funds by our government offers an opportunity for influence
peddling and corruption. So I see this as an alternative that should not be
taken.
President Bush’s Social Security Proposal
President Bush has proposed that each individual salaried worker be
permitted to invest part of his Social Security contributions into a stock or
bond fund of which he would be the owner. Besides the claimed greater
rate of return, his proposal will also allow each individual to have control
over the way his contribution is invested. Each worker would be able to
have a portion of his Social Security contributions invested in some fund
selected by himself. This portion would be invested in bond or stock
mutual funds that would be expected to have a higher annual return that
is received from Treasury bonds. Bush has not put forth the details of his
plan and in this case details are very important in determining its merits
.
So each worker would expect a higher Social Security payment upon
retirement, but there will be some risk if he retires at a time when the
stock market or bond prices are unusually low. This is assumed to be a
small risk because over a period of the forty years that would apply to the
young workers, the stock market has always showed a favorable rate of
return.
However part or even all of this gain could be used up in administrative
costs needed to manage such relatively small additions each year. Such
costs should be precisely made clear before any such plan is adopted. And
there would need to be some protection against some workers being lured
by unscrupulous financial promoters into poor investments.
One defect in this plan is that during the initial approximate forty years
that the first group of workers is not contributing the full amount of their
into the Social Security Fund, this would create a deficit in Social Security
Funds which would have to be made up by the taxpayers. It is estimated
that this would cost 2 to 3 trillion dollars, a one time cost that would add
to the Federal deficit.
An Alternative Method of Funding Social Security
In all debates last year about Social Security, no one questions that
funding it should continue to come from payroll taxes paid by the employer
and the employee.
But there is an alternative which I believe should be considered. Everyone,
both liberals and conservatives, agree on the importance of minimizing the
number of our unemployed. So to the degree that the Social Security tax
is a factor that is a disincentive to employment, it would be good to
eliminate this means of providing funds for it. An alternative would be to
fund Social Security as part of the Federal budget. To pay for this
increased Federal expenditure, we could increase certain specific tax rates.
1.We could increase corporate tax rates to about the higher level that
corporations paid in the 1950’s. Economists will claim that by thus
reducing the net profits, business activity will be reduced resulting in fewer
jobs and lesser payments to shareholders. But this is questionable. With
all employees having 6% more in their paychecks, this would be a stimulant
for consumer spending. The added taxes for corporations would be
somewhat reduced by the elimination of the 6% payroll tax. And we might
remember that the 1991 income tax increases under President Bush senior
was followed by a decade of corporate prosperity.
2.Or we could fund Social Security taxes by increasing individual income
taxes. If at the same time we restored the higher tax rates of the
wealthy, that we had prior to the 1980 Reagan cut, the net affect on
middle income taxpayers who get most of the income from employment
could be zero. Not all of the Social Security funding would have to come
from individual income taxes because at the same time corporate tax rates
could be increased to compensate for the 6% payroll tax they now have to
pay.
By funding Social Security either by high corporate taxes or by higher
individual taxes or by a combination of both, we would achieve desirable
social effects.
Business, with a lesser tax on employees, would have less incentive to
replace workers with automation or with outsourceing production. So total
employment would be increased and a usual 5-6% unemployment rate
might be reduced to the theoretical 2% minimum. Any shift that results in
a benefit to middle or lower class wage earners in comparison with those
who get their income from business profits seem to be a desirable social
objective.
Notes:
Our immigration policy has an appreciable effect on the SocialSecurity
situation. The more immigrants of working age or younger we have, the
better the ratio of those paying into the Social Security system compared
to those receiving payments from it. But in the longer run, when these
immigrants reach retirement age, a still larger amount of new workers will
be needed to support them. To maintain a satisfactory ratio of workers to
retirees, we will need a never-ending population growth-an impossibility.
The payments to eligible recipients are increased each year in proportion to
the cost of living index. I have read that in the 1980s Congress made a
change whereby the calculation of future benefits is based not on the cost
of living index, but on average wage increase each year. I am not sure
how this works. It would be helpful if we knew just how future benefits to
each person are calculated. Once he has started receiving payments, it is
clear how each year the payment will be adjusted, but it is not clear how
this first payment is calculated.
There is already in effect a program to progressively slightly raise the 65
year age for eligibility and it is said to now be 65 and ½. I do not know the
details of this but I believe it makes much too small an adjustment.
An article in the NY Times this month said that” for 2/3 of the elderly,
Social Security supplies the majority of day-to-day income and that one
study found that “48% would have been below the poverty line if they
were not receiving Social Security.”
The above article said the trust fund is now earning about 6%. This figure
puzzles me; the 30 year Treasury bond rate is quoted today at 4.66%,
down from 4.91 % a year ago. This is just one more bit of confusion that
makes it hard to evaluate what best should be done.
Since 1965, there has been an Enron-type fraud in the Federal Budget
figures as they have been calculated and presented to the public. It
started with Lyndon Johnson who in order to cover up the deficit caused
by his expenditures in Vietnam, started the practice of including this
annual Social Security surplus with general government income. This
deceptive practice, which amounts to labeling money received as a loan as
income, has been continued to this day. This is an “unfunded liability”
which the government has been ignoring. Corporations have a similar
unfunded liability when they promise pensions for their employees, but
Corporations are forced by law to set aside money which will cover these
pensions or “unfunded liability” when it is needed. The government has
not set aside funds to cover the Social Security loan money it has been
receiving. So starting in 2018, taxpayers will have to bear this burden with
increased taxes or have this added to the Federal deficit.
January 20, 2005
Rev. March 29, 2006
Social Security
After a flurry of attention last year, Social Security now is a dead issue in
Congress. But the financial program that supports it is slowly weakening.
So at least the younger generation should be aware of the coming problem
and of alternate ways to correct the problem.
The Situation
Ever since the Social Security system was established in 1935, its receipts
each year from employees and employers had been greater than the
amount that is paid out to the elderly. This excess of money has been
accumulated in what is titled “The Social Security Trust Fund.” Each year,
this excess of receipts over payments have been loaned to the U.S.
Treasury, so the Treasury has a clear legal obligation to repay these funds
to the Social Security System when the time comes that the Social Security
System needs it in order to continue its regular payments. And by law,
the Social Security System is obligated to continue these payments—a
promise that has been made to those who have been paying into the
system.
It has been calculated, and there is no disagreement on this point, that
until about the year 2018, the Social Security System will continue to
receive more money each year than it pays out.
The next period to be considered is from about 2018 to about 2042.
During this period, Social Security would need to pay out each year more
than it receives. During this period, the favorable financial situation our
government has been enjoying will be reversed. Instead of Social Security
loan money, which has been used each year to help balance the Federal
Budget, the Treasury will have to each year repay to Social Security
enough of the loan money so that Social Security can continue to make its
payments. Thus the government will have to raise more money by
taxation or allow the Federal deficit to get bigger.
About the year 2042, the situation will again change. At this time, due to
several factors that have arisen since 1935 such as rising longevity and
slower population growth, At present 3.3 workers are paying onto the
system for each retirees receiving its benefits; by 2042 this ratio will be
less than 2 to 1. Social Security income will no longer equal its payment
obligations. But the Social Security system would not be bankrupt as
Bush has proclaimed. It would be able to continue payments but only at
about 70% of the normal rate.
What Can be Done?
There are several ways to avoid this coming shortage of Social Security
funds if our politicians have the courage to do so. But this will be difficult
because all contemplated changes will have strong objection from some
portion of the voters. The following are some actions we could take now to
forestall the 2042 dilemma.
1.We can increase the retirement age by several more years; 70 years has
been suggested. This makes sense because workers are living much
longer than was anticipated in 1935, when the year 65 was established.
And a much bigger proportion of workers are now in less physically
demanding jobs than was the case in 1935. To ease the physical and/or
mental strain on over-65 workers, employers could be made to adjust
working hours and conditions and be allowed to correspondingly reduce
the pay rate of those over 65 to match their lesser workload. In my
opinion, this is an action we should take to alleviate part of the existing
shortfall.
2.We could raise the present salary limits for social security deductions
from its present $90,000 per year. This would affect the 6% of people
whose salary incomes are above $90,000. It has been estimated that
raising this limit to $140,000 per year would take care of ½ of the present
anticipated shortage. In my opinion, we should do this, but I question
whether there should be a $140,000 limit.
3.We could eliminate Social Security payments to those whose income, as
shown by their income tax return, is so high that they clearly do not need
this additional income. The objection that has been raised to this is that
this puts social security payments seen as a form of welfare, but as I view
it, this should be done and seen as an additional tax on the wealthy.
4.The Social Security payments by employees and employers could be
increased as has been done several times already. One estimate is that an
increase of 2% to the present 12.4% payroll tax would take care of the
expected shortfall in 1942. Of course this would be an undesirable burden
on both employers and employees. This increase in the equal amount paid
by employers would discourage companies from hiring, and this increased
tax paid by employees would discourage people from working in jobs
covered by Social Security, thus encouraging moonlighting. My opinion is
that this should not be done.
5.We could increase the rate of return on the Social Security Trust Fund
by having the Trust fund in a manner that would yield a greater return
than is now received by investing it in Treasury bonds. For example
money in the Social Security Trust Fund could be invested in stock market
index funds or corporate bond funds or in a combination of both. Over a
long period of time it is almost certain that this would increase the income
of the Trust Fund. The record of the stock market has been that in spite
of periods of losses, it has over long periods of 40 years or more been a
gain. For the past century it is said that the average annual gain of 9%.
But this would be upsetting to our financial structure in that the Treasury
has always had a Social Security trust fund as one of the buyers of
Treasury bonds. And there is the danger that the purchase of stocks or
stock funds by our government offers an opportunity for influence
peddling and corruption. So I see this as an alternative that should not be
taken.
President Bush’s Social Security Proposal
President Bush has proposed that each individual salaried worker be
permitted to invest part of his Social Security contributions into a stock or
bond fund of which he would be the owner. Besides the claimed greater
rate of return, his proposal will also allow each individual to have control
over the way his contribution is invested. Each worker would be able to
have a portion of his Social Security contributions invested in some fund
selected by himself. This portion would be invested in bond or stock
mutual funds that would be expected to have a higher annual return that
is received from Treasury bonds. Bush has not put forth the details of his
plan and in this case details are very important in determining its merits
.
So each worker would expect a higher Social Security payment upon
retirement, but there will be some risk if he retires at a time when the
stock market or bond prices are unusually low. This is assumed to be a
small risk because over a period of the forty years that would apply to the
young workers, the stock market has always showed a favorable rate of
return.
However part or even all of this gain could be used up in administrative
costs needed to manage such relatively small additions each year. Such
costs should be precisely made clear before any such plan is adopted. And
there would need to be some protection against some workers being lured
by unscrupulous financial promoters into poor investments.
One defect in this plan is that during the initial approximate forty years
that the first group of workers is not contributing the full amount of their
into the Social Security Fund, this would create a deficit in Social Security
Funds which would have to be made up by the taxpayers. It is estimated
that this would cost 2 to 3 trillion dollars, a one time cost that would add
to the Federal deficit.
An Alternative Method of Funding Social Security
In all debates last year about Social Security, no one questions that
funding it should continue to come from payroll taxes paid by the employer
and the employee.
But there is an alternative which I believe should be considered. Everyone,
both liberals and conservatives, agree on the importance of minimizing the
number of our unemployed. So to the degree that the Social Security tax
is a factor that is a disincentive to employment, it would be good to
eliminate this means of providing funds for it. An alternative would be to
fund Social Security as part of the Federal budget. To pay for this
increased Federal expenditure, we could increase certain specific tax rates.
1.We could increase corporate tax rates to about the higher level that
corporations paid in the 1950’s. Economists will claim that by thus
reducing the net profits, business activity will be reduced resulting in fewer
jobs and lesser payments to shareholders. But this is questionable. With
all employees having 6% more in their paychecks, this would be a stimulant
for consumer spending. The added taxes for corporations would be
somewhat reduced by the elimination of the 6% payroll tax. And we might
remember that the 1991 income tax increases under President Bush senior
was followed by a decade of corporate prosperity.
2.Or we could fund Social Security taxes by increasing individual income
taxes. If at the same time we restored the higher tax rates of the
wealthy, that we had prior to the 1980 Reagan cut, the net affect on
middle income taxpayers who get most of the income from employment
could be zero. Not all of the Social Security funding would have to come
from individual income taxes because at the same time corporate tax rates
could be increased to compensate for the 6% payroll tax they now have to
pay.
By funding Social Security either by high corporate taxes or by higher
individual taxes or by a combination of both, we would achieve desirable
social effects.
Business, with a lesser tax on employees, would have less incentive to
replace workers with automation or with outsourceing production. So total
employment would be increased and a usual 5-6% unemployment rate
might be reduced to the theoretical 2% minimum. Any shift that results in
a benefit to middle or lower class wage earners in comparison with those
who get their income from business profits seem to be a desirable social
objective.
Notes:
Our immigration policy has an appreciable effect on the SocialSecurity
situation. The more immigrants of working age or younger we have, the
better the ratio of those paying into the Social Security system compared
to those receiving payments from it. But in the longer run, when these
immigrants reach retirement age, a still larger amount of new workers will
be needed to support them. To maintain a satisfactory ratio of workers to
retirees, we will need a never-ending population growth-an impossibility.
The payments to eligible recipients are increased each year in proportion to
the cost of living index. I have read that in the 1980s Congress made a
change whereby the calculation of future benefits is based not on the cost
of living index, but on average wage increase each year. I am not sure
how this works. It would be helpful if we knew just how future benefits to
each person are calculated. Once he has started receiving payments, it is
clear how each year the payment will be adjusted, but it is not clear how
this first payment is calculated.
There is already in effect a program to progressively slightly raise the 65
year age for eligibility and it is said to now be 65 and ½. I do not know the
details of this but I believe it makes much too small an adjustment.
An article in the NY Times this month said that” for 2/3 of the elderly,
Social Security supplies the majority of day-to-day income and that one
study found that “48% would have been below the poverty line if they
were not receiving Social Security.”
The above article said the trust fund is now earning about 6%. This figure
puzzles me; the 30 year Treasury bond rate is quoted today at 4.66%,
down from 4.91 % a year ago. This is just one more bit of confusion that
makes it hard to evaluate what best should be done.
Since 1965, there has been an Enron-type fraud in the Federal Budget
figures as they have been calculated and presented to the public. It
started with Lyndon Johnson who in order to cover up the deficit caused
by his expenditures in Vietnam, started the practice of including this
annual Social Security surplus with general government income. This
deceptive practice, which amounts to labeling money received as a loan as
income, has been continued to this day. This is an “unfunded liability”
which the government has been ignoring. Corporations have a similar
unfunded liability when they promise pensions for their employees, but
Corporations are forced by law to set aside money which will cover these
pensions or “unfunded liability” when it is needed. The government has
not set aside funds to cover the Social Security loan money it has been
receiving. So starting in 2018, taxpayers will have to bear this burden with
increased taxes or have this added to the Federal deficit.
Social Security
