Social Security and Corporate Welfare

‘Social Security—the nation’s largest, costliest, and most successful domestic program has reached a critical juncture in its development. As its creators anticipated, nearly every wage earner now pays taxes into the system. In principle, all citizens may be eligible for “entitlements” at some point in their lives. Yet . . . senior citizens worry that their benefits will be cut; younger Americans are skeptical—if not cynical—about their own benefits upon retirement. ’ This summation of the state of Social Security was written more than a decade ago.

Looking back, it seems as though the Social Security system frequently reaches a state of crisis in which predictions of its end arise. Since it was enacted in 1935, Social Security has been amended often, most recently in 1983, when Congress imposed a tax on the benefits of high-income retirees, raised the retirement age, and revised the tax-rate schedule. Today, the future of Social Security is in the news again. On the 27th of January last year, President Clinton in his State of the Union address recommended that the projected federal budget surplus be used to save Social Security.

He proposed to reserve 100 percent of the surplus until all necessary measures to strengthen the Social Security for the twenty first century were taken. The reason Social Security is of such concern is that the extremely large group of citizens born in the post-World War II period—the much-discussed baby-boom generation—is heading toward retirement. The generation that will take its place in the workforce is far smaller in proportion to the number of retirees, raising fears about the sustainability of Social Security.

In the past, proposed solutions to the various problems facing Social Security aroused great debate. Each time, however, the arguments were stilled, repairs were made, and the system continued to fulfill its mandate. That uncertainty about the future has resulted in suggestions for change that range from minor adjustments to complete privatization of the system. Social Security is a contributory social insurance program providing benefits to millions of Americans. Workers contribute financially to the system during their careers and earn entitlement to family benefits upon retirement, disability, or death.

Currently, nearly 44 million Americans receive benefits under the Old Age and Survivors Insurance and Disability Insurance (OASDI) programs that make up Social Security. This group includes some 30 million elderly retirees and their dependents, 6 million disabled workers and their dependents, and more than 7 million survivors of deceased workers. About 96 percent of workers in the United States contribute to Social Security, paying a flat tax of 6. 2 percent of their wage income up to $68,400; their employers contribute an equal amount.

If, however, as many economists believe, employers shift the cost of Social Security taxes onto workers in the form of lower wages, workers in effect may actually bear a substantially larger share of the tax burden than employers. Self-employed people pay both their own and their “employer’s” share; their tax rate is 12. 4 percent, half of which is tax deductible for income tax purposes. 8 While the payroll tax is by far the largest source of funding for Social Security, a small amount of additional revenue is raised through the taxation of the Social Security benefits of high-income beneficiaries.

Social Security is largely funded on a pay-as-you-go basis. Social Security is not a “piggy bank” that employees put money into and then take out of when they retire. The benefits that today’s Social Security retirees receive are paid out of taxes collected from today’s workers that are earmarked for the payment of these benefits. Out of this tax money, the government writes Social Security checks and mails them to beneficiaries. Any money left over after paying benefits is put into the Trust Fund, which is invested in U. S. government securities to provide funds for future use. What’s Right with Social Security

Social Security provides a substantial number of workers and their families with insurance against the financial risks associated with the death or disability of a breadwinner. In 1996, the benefits paid by Social Security exceeded $347 billion. These benefits, in combination with Medicare health insurance, have dramatically reduced poverty for the aged in America. In 1959, the U. S. Census Bureau estimated that more than 35 percent of elderly Americans were poor. By 1996, in large part because of changes in the Social Security and Medicare systems, the poverty rate among senior citizens was 10. ercent.

Social Security retirement benefits are portable, following workers from job to job. In contrast, many employer-provided pension plans offer benefits only to workers who stay with the same company for an extended period of time. Social Security benefits are adjusted annually to protect against erosion caused by inflation, whereas private pension programs and insurance plans rarely guarantee such protection. Under Social Security, disability and life insurance coverage is provided without regard to the health of the individual. Workers with a very low wage are guaranteed a minimum benefit.

This progressive feature of Social Security helps give all workers in America a chance at a decent retirement, even if the type of work they did, or personal circumstances, did not enable them to accumulate wealth or become eligible for a private pension plan. The program runs smoothly, regardless of political or economic events. Unlike other entitlements, such as Medicaid and welfare, Social Security does not require state and local governments to participate in program financing or administration. Despite wars, economic recessions, and recent government shutdowns, Social Security checks have always reached recipients in a timely fashion.

What’s Wrong with Social Security? In 1935, after bank failures and a stock market crash had wiped out the savings of millions of Americans, the country turned to Washington to guarantee the nation’s elderly a decent income. The solution was Social Security. More than six decades later, with the gigantic Baby Boom generation approaching retirement age, Social Security faces a funding crisis. By about 2012 more money will be going out to Social Security recipients than will be coming in from workers’ payroll taxes.

At the same time, Americans are living longer. Projections of longer life expectancies and declining birth rates suggest that, after 2030, more than 20 percent of all Americans will be elderly, a larger proportion than ever before. This larger number of retirees will have to be paid their benefits from taxes collected from a smaller pool of workers, relatively speaking. The system’s trust fund can cover the difference for a while, but by about 2032 the trust fund will be empty and the program will no longer be able to meet all its obligations.

Without Changes, the Social Security Trust Funds May Be Depleted in 2032. Future Retirees Will Probably Receive Less Generous Benefits Than Today’s Elderly The benefit-to-contribution ratio on Social Security contributions has been declining since the establishment of the Social Security system. The earliest retirees paid low taxes for a short period of time and received sizable benefits upon retirement, consequently reaping substantial “returns” on their contributions.

Over time, as Social Security benefits became more generous and the number of individuals receiving benefits grew, the payroll tax was increased. The benefit-to-contribution ratio of Social Security has declined for each new cohort of retirees because later generations contributed to the Social Security system for the duration of their careers and were subject to higher payroll tax rates. Social Security’s Payroll Tax Is Regressive In 1998, Social Security’s 6. 2 percent payroll tax was assessed on only the first $68,400 of a worker’s earnings.

Because unearned income (interest and capital gains) is not subject to taxation under a payroll tax and earned income beyond $68,400 is not taxed, wealthy individuals pay a lower fraction of their total income in Social Security taxes than other people. Social Security May Encourage Early Retirement, Putting Added Pressure on the System Over the past fifty years, older Americans have been retiring at a progressively younger age. In 1950, 83. 4 percent of men aged fifty-five to sixty-four were employed; by 1990, only 67. 8 percent of men in this age group were working.

Today, most men and women retire before age sixty-five; in fact, almost 60 percent receive Social Security benefits at age sixty-two, when reduced benefits for early retirement first become available. Some economists are concerned that earlier retirement, combined with increased longevity, exacerbates the problem of economically sustaining an aging population. If the trend toward early retirement continues as the population ages, an even smaller share of workers will be supporting a larger proportion of retirees. Historically, politicians have had a simple, consistent position on Social Security: Do nothing.

Democrats steadfastly opposed tinkering, concerned that any changes would erode the safety net provided by a program they revere as the greatest and most inviolable legacy of the New Deal. And while many Republicans consider Social Security the ultimate Big Government program – with plenty of social engineering thrown in for good measure – they learned over time that its popularity with the voters made it untouchable. Facing the irreversible demographic trends, however, even staunch defenders of Social Security now acknowledge that it is time to talk about change.

A spirited bipartisan debate is raging, in Capitol Hill and across the nation, over a handful of possible changes all of which were considered unthinkable a few years ago: Cutting benefits across the board (or just for the wealthy); Raising the payroll tax across the board (or just for the wealthy); Raising the age at which retirees become eligible; Investing the trust fund more aggressively; Letting workers contribute to personal security accounts that the government would manage (or that workers would manage themselves). Proposals that call for investment in the private sector get most of the attention.

One school of thought calls for the system to invest some of its money in the financial markets, instead of in relatively listless government bonds. Supporters say that would create a windfall; opponents say it’s too risky. The most dramatic proposals would have workers place the bulk of their payroll taxes in individual retirement accounts that they could invest as they choose. Champions of this idea – mostly but not exclusively conservatives and libertarians – say it would boost returns and restore workers’ faith in the system.

A more moderate approach calls for the individual accounts to supplement a system that would be similar to the current one. Radical privatization would end Social Security as we know it. Social Security is not simply an investment vehicle or a pension program – and never has been. Today, Social Security provides benefits to about 43 million Americans, not only to retired workers but also to the spouses and dependents of workers who die prematurely and to disabled workers and their dependents.

Social Security looks to many people like a simple (if massive) retirement savings account. After all, you generally contribute through payroll deductions, then get money back after you retire. But Social Security in fact is a complex social program. By design, Social Security involves massive subsidies from the next generation of retirees to this one, from single workers to married couples, from two-earner couples to one-earner couples, from high-income earners to low, from the able-bodied to the disabled, and from those who die early to those who die late.

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