Wednesday, March 30, 2005

Social Security - Ending the Insecurity (an english 118 paper)

President Bush threw down the gauntlet in his State of the Union Address when he mentioned privatizing a portion of Social Security. President Bush wants Americans to be able to invest four percent of their Social Security taxes into a personal savings account. This proposal, and any others suggesting privatization of Social Security, have come under heavy criticism from many Democrats. Recently, most Democrats have adamantly opposed changes that would allow for privatized accounts. Today, retirees struggle to get by when Social Security is their only income; however, with personal savings accounts, Americans may be able to retire without the worry of poverty, and in fact may even be able to leave a nest egg for their heirs.

After the Great Depression, Social Security was set up to be a safety net to protect older Americans. The Social Security Act was passed by Congress and signed into law by Franklin D. Roosevelt in 1935. According to Fiore (2005), when Social Security was implemented, President Roosevelt considered it only one part of a three-part system he called “a retirement tripod.” President Roosevelt’s three-pronged vision called for personal savings, pensions, and Social Security as a way to save for retirement (paragraph 1). Today, unfortunately, the Office of the President (n.d.) reports that one-third of all retirees count on Social Security for ninety percent of their income.

According to Williams (2005), the original plan for Social Security was far different than today’s reality. In 1936, the government distributed pamphlets explaining the Social Security plan to Americans. The explanation included a breakdown of how much money each American worker would pay into the system. Social Security tax would begin in 1936, at a rate of 1.5 percent, increasing to 2 percent after three years, and concluding in 1949, when it would be raised for the final time to 3 percent, applicable to only the first $3,000 earned by the worker. After that, the pamphlet explained, the cost would never be any higher (paragraph 4). Also according to Williams (2005), American workers today pay 15.6 percent Social Security tax on the first $90,000 of their income. Roosevelt’s pamphlet also explained that on November 24, 1936, the U.S. government was going to set up accounts for each contributor, and all money paid into the system would be held in that account for the worker until retirement (paragraphs1 and 2). Today, these accounts are nonexistent, and the money put into Social Security belongs to the government, and not to the person who has invested the money. In a report written by Tanner (2004), he states that two landmark U.S. Supreme Court cases, Helvring vs. Davis, and Flemings vs. Nester, were decided against American workers owning their Social Security accounts (pp. 5). Thus began the downfall of Social Security.

In the final report of the President’s Commission to Strengthen Social Security (1999), it is asserted that President Roosevelt knew, even in 1939, that Social Security was not a cure-all to protect American workers in their retirement; that is why he signed an amendment to Social Security. In his address to the nation after signing the amendment, he said, “We must expect a great program of social legislation, such as is represented in the Social Security Act, to be improved and strengthened in the light of additional experiences and understanding.” He also urged an “active study” of future possibilities (pp. 5). As is noted by Fiore (2005), in1950 there were sixteen workers paying into Social Security for every one retiree drawing from Social Security. Today, that number has shrunk to only three workers per retiree. In addition to the dwindling number of workers per retiree, forty-five percent of retirees are currently opting for early retirement, putting an even greater strain on the system (paragraph 4). It is apparent, there is no doubt something must be done in the near future to help Social Security survive.

In 2005, American workers are forced to pay 15.3 percent of their income into a forced savings account that does not exist. Both the worker and their employer pay this 15.3 percent, with both parties paying 7.65 percent. One of the biggest myths about Social Security is that employers pay half of the workers’ Social Security; however, it should be noted that the employer takes into account the 7.65 percent when determining the wages of employees (Social Security Online, n.d.). Another great Social Security myth that some politicians love to propagate is that the money paid into Social Security is put into a “lock box” and set aside; the truth is, the money in the “lock box” was spent by Congress years ago, and Congress has replaced all of the money in the “lock box” with I.O.U.’s. Even today, Congress continues to shift all excess money from Social Security into the general fund and spends it, without a plan to repay it.

Social Security money that is not siphoned into the general fund is paid out in three ways: retiree benefits, disability benefits, and survivor benefits. Retirees receive a check each month based on the age at which they retired and how much they contributed in Social Security taxes. For example, a retiree who had an income averaging $50,000 per year, who opts to retire at the age of 62, receives a check of $1,422 per month. The amount the retiree receives increases to $1,825 per month if he or she waits until the age of 65.25 to retire. If he or she should decide to wait until the age of 70 to retire, the amount is increased to $2,045 per month. This is, of course, pre-tax money (National Academy – Benefits Paid, n.d.). An employee who makes $50,000 per year earns $4,166 per month – pre tax. It is easy to see that if a person retires on Social Security alone, regardless of what age they retire, there is a significant reduction in the amount of money coming into their household. This is why it is absolutely necessary to have some sort of privately held retirement savings.

The second way in which Social Security is distributed is through a workers’ disability fund. When a worker is disabled, the money he or she draws is also dependent on how much is earned, on average, before the disability occurs. To a worker making $50,000 per year, the disability payment is $1,553 per month. This is considerably less than the $4,166 he or she earned per month before the disability. If a worker earns $65,000 per year, the disability benefit is raised to $1,728 per month, but the same worker, before a disability, earns $5,416 per month. Finally, if a worker earns more than $87,000 per year, the disability amount would be raised – and capped – at $1,975 per month. This person, before becoming disabled, would have a take home pay of at least $7,250 per month. If a worker becomes disabled, their spouse and any children under the age of eighteen may also collect a Social Security disability check, equal to one-half of the amount received by the disabled worker. An entire family cannot collect more than 150 percent of the Social Security disability due the disabled worker. It is clear that even with Social Security as a safety net, private disability insurance is a must (National Academy – Disability, n.d.).

The final manner in which Social Security is paid is to the spouse and any children under the age of eighteen of a deceased worker. This amount is equal to one-half of the amount of monthly Social Security to which the deceased worker was entitled. This amount is paid to the spouse of the deceased and every one of his or her children until they reach the age of eighteen. The spouse of a deceased worker who earned an average of $50,000 per year and who retired at the age of 62, with no children under the age of eighteen, would receive a check every month in the amount of $772.50. It would be extremely difficult, if not impossible, for anyone to survive on this small stipend. Hence it is easy to recognize the importance of an individual owning sufficient term life insurance (National Academy – Survivor Benefits, n.d.).

Benefits currently distributed by Social Security are based upon today’s standards, and are subject to change or elimination at any time. It is expected that Social Security will be bankrupt within the next thirty-five years. As reported on the Social Security Administration’s website (Social Security Online, n.d.), Social Security will begin to pay out more than it receives in payroll deductions, starting as early as 2018. By 2027, it will take an additional 200 billion dollars to keep Social Security afloat, and by 2033, that amount will increase to 300 billion dollars. In 2042, Social Security will be completely bankrupt, even if a 27 percent cut in benefits for retirees is implemented. In 2004, Medicare tax, which is 1.45 percent of Social Security tax withheld, depleted all of the excess funds collected through Social Security taxes. Beginning this year, 3.6 percent of the money needed to keep Social Security and Medicaid solvent will have to be diverted from the general fund into Social Security (Cato Institute – WSJ, 2005).

Politicians have discussed Social Security reform for years, with no clear solution in sight. President Clinton, in his 2000 budget proposal said, “Social Security does not consist of a real economic asset that can be drawn down in the future to fund benefits.” President Clinton went on to say that Social Security, “Will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.” President Clinton opted for raising taxes on the Social Security benefits received by retirees (Tanner, 2005). With politicians making these types of decisions, it is easy to understand why the dream of Social Security has become a nightmare for young workers, providing a low, below-market rate of return. Returns on investment of Social Security are expected to be less than two percent for most of today’s workers (Tanner, 2005). Social Security has overstepped its bounds; as proof of this, in 1997, 79 percent of American households paid more in Social Security tax than income tax (National Commission, 1999).

Social Security reform is desperately needed. President Bush recognized this fact, and when he ran for office in 2000, he started talking about privatizing a portion of Social Security. His position was great news for all those who already knew that Social Security was broken. Once elected, President Bush assigned a non-partisan commission to look at partial privatization of Social Security. This Commission studied the idea and decided it would be something worth implementing. The recommendation of the Commission was to let employees keep 2 percent of the 15.3 percent paid in Social Security taxes, to invest in a plan similar to the thrift savings plans enjoyed by government employees (National Commission, 1999). The thrift savings plans that the Commission suggested could be used offer three options for investing. The first, the G fund, averaged 6.7 percent in the past decade. The second, the F Fund, averaged 7.9 percent in that same period. Finally, the best option of the three, the C Fund, earned an amazing 17.4 percent in the 1990s (National Commission, 1999). Rates of return this high (the average of the three being approximately 10.66 percent) are one of the reasons the Commission recommended private accounts be authorized. Just two percent of Social Security taxes growing at 17.4 percent rate would quickly earn dividends surpassing the other 13.65 percent growing at a snail’s pace of just 2 percent per year.

The President’s non-partisan Commission is not the only group studying the feasibility of privatizing a portion of Social Security. The Cato Institute has studied the possible effects of allowing 6.2 percent of Social Security tax to be privatized (Tanner, 2004). The Cato Institute found that the biggest winners in such a plan would be low-income and minority workers. They contend that because these groups have lower life expectancies, the privatization plan would allow them to pass down any money saved to their spouses and children, whereas with Social Security, all money invested is lost, except for miniscule survivor benefits. The Cato Institute also concludes that this plan would also greatly aid families in breaking out of a cycle of poverty (Tanner, 2004).

The Cato Institute determined that a worker earning an average of $50,000 annually, who is allowed to save 6.3 percent of his or her Social Security tax, and earns an annual interest rate of ten percent on that money, would have a retirement nest egg of $987,850. If the retiree continued to receive ten percent interest, he or she could draw a pension of over $98,000 a year without ever touching the principle. That $98,000 per year is in sharp contrast to the $17,000 per year he or she would have received from Social Security. One of the most compelling arguments for Social Security privatization made by the Cato Institute, is that when that worker dies, he or she would be able to pass that $987,850 to his or her heirs. In the Social Security plan, when a worker dies, the government keeps whatever money remains (Tanner, 2004).
Similarly, President Bush’s plan, the details of which have not yet been released, proposes a four percent contribution of Social Security taxes to private accounts. Even with only the four percent President Bush endorses, there would be a greater chance for a worker to retire with an abundance of funds at his or her disposal. Not all politicians agree with President Bush or the Cato Institute regarding the privatization of Social Security. According to Cato Institute - Wessel (2005), some politicians believe the answer to the Social Security crisis is to borrow money to pay today’s retirees and water down current benefits for future retirees (paragraph 1).

Most Democrats who oppose Social Security privatization fall into one of three categories. The first group believes there is no problem with Social Security, and it should be left alone. With all of the evidence that Social Security is going broke, it may be that these politicians are too scared of offending constituents to do anything but pretend that everything is all right. The second group of Democrats admits Social Security is in trouble but believe modest tax increases are the answer to the problem. This group apparently likes to keep Americans dependent on the government for their survival. The third group believes privatization would work, but that the government should control the money invested. With the government’s history of raiding the cookie jar, this plan could only be a road to disaster.

Today’s retirees struggle when Social Security is their only income. The logical, moral, ethical solution to the retirees’ struggle is to implement personal savings accounts. These accounts can allow Americans to retire without the worry of poverty, and also allow them to leave a nest egg for their heirs. Imagine what a generation of retirees could do with the excess of funds that personal savings accounts can generate. These retirees would be able to not only help their families, but their communities and churches as well. Political partisanship needs to be put aside in the Social Security debate, and privatization must be enacted as quickly as possible. All Americans are one step closer to retirement every day, and the sooner politicians act, the greater the amount of money today’s middle-aged workers will be able to call their own.

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