HOW TO FIX SOCIAL SECURITY – AND HOW NOT TO

Looking at the current status of the Social Security Trust Funds, as reported in the 2002 Annual Report of the Trustees of the Social Security and Medicare Trust Funds, one might wonder why there is such a concern about “fixing” social security.  Under the most pessimistic assumptions the Social Security Trust Funds will not be exhausted until the year 2029.   Under the intermediate projection the Trust Funds will not be exhausted until 2041, 39 years from now.   And under the most favorable economic conditions the current social security system will be able to pay benefits throughout the full 75-year projection period.

Something that may or may not happen in 39 years can hardly be called a “crisis” that demands immediate radical action.

Even though we are not in a crisis situation, it does make sense to do now what we can to reduce the likelihood that the Trust Funds will become depleted at some point in the future.  Many simple and gradual steps can be taken, as they have been taken in years past.   Among these steps are:

Another option is to have a transfer of funds from general revenues into the social security system when and if revenues in the Trust Funds are depleted. 

Minor and incremental changes such as these can preserve social security as the primary and secure technique for reducing poverty among older Americans.

There are those out there, however, who see the possibility of depletion of Trust Fund reserves in 39 years as a “crisis” and are calling for massive and radical overhaul of the social security system: privatization or partial privatization.  They claim that people could get a larger return investing in the stock market.   There are numerous problems with such an approach.

Social Security is an Insurance Program, not a Personal Savings Program

The four trust funds administered by the Social Security Administration are: the Old-Age and Survivors Insurance Trust Fund; the Disability Insurance Trust Fund; the Hospital Insurance Trust Fund; and the Supplementary Medical Insurance Trust Fund.   The latter two comprise the Medicare program.  Note that all are insurance programs.

The way that insurance programs work is that everybody pays premiums (i.e. the payroll taxes in this case), knowing that in the end some will have greater need for the insurance payouts than others.  If all premiums go into private investment accounts, where will the funds come from to pay the disability payments that are now paid to those who find themselves unable to work?   And how will one who lives very much longer than expected fund his or her retirement without giving up 20 percent of his or her savings for purchasing an annuity?   And what of those who did not buy an annuity and run out of retirement funds needed to survive?

 Social Security Was Established As a Pay-As-You-Go System

When Congress established Social Security in 1935, the retirement and disability benefits were made available to everybody, obviously thus including those who had not paid into the system.   These benefits were paid out of the premiums paid by working people who were now paying into the Social Security Trust Fund.   It has been run as a pay-as-you-go system ever since.   This decision by Congress has profound implications for the proposal to divert all or part of the social security payments into private accounts.   The payments that are made under the current system are needed to pay those receiving benefits.   If even a portion of the payments into the system are diverted to private accounts, the Trust Fund will become depleted sooner than projected.

This creates what is known as the “transition” problem for proposals to privatize social security.  How do we pay current beneficiaries if part or all of the funds being paid into the system are diverted into individual private accounts?    The only proposal to deal directly with this problem is a most grotesque one.   Harry Browne, former Libertarian candidate for president, proposed selling off the national parks, the national forests, and other federal lands to fund the transition to a private system.   It is unlikely that many Americans would want Yellowstone and the Grand Canyon sold to the Disney Company for private resorts or amusement parks.

The fact is that any plan for even partial privatization will require significant reductions in benefits.  The Brookings Institute estimates that diverting even a portion of the payroll tax from the Social Security system to individual accounts would reduce Social Security benefits by 41 percent for all workers if long-term financial balance were to be retained.   Some people who retire when the market is high might do well; those who retire during a down-turn might spend their retirement in poverty.

 The Administrative Fees for Private Social Security Accounts Would Be Huge

It should come as no surprise that the greatest support for privatization of the Social Security program comes from the Wall Street brokerage firms.    Under the Social Security Administration the administrative costs for running the Social Security system are 0.7 percent of total expenditures per year.   The administrative costs of running private accounts would be about 5 percent.   Chile ’s privatized system has administrative costs of 10 to 20 percent.  The differ­ence would amount to tens of billions of dollars paid from workers’ retirement savings to the financial industry.

 Not Everyone Would Guess Lucky in Choosing Where to Invest

Finally, a serious problem with private accounts is that some people might be unlucky and invest in stocks that do not increase in value, and would have a marginal retirement income.    Some would be lucky and invest in stocks that go up; these people would do better than under the current system.   And still others would invest in the next Enron or Global Crossing; they would reach retirement age with no savings whatsoever.   What would become of them under a system of private Social Security accounts?

 Conclusion

Our current Social Security system is secure for another 39 years or so, and with minor gradual changes that can be extended.  Funds are invested in government bonds paying market interest rates, and nothing is more secure than government bonds. Administrative costs are a tiny fraction of what they would be under private funds run by Wall Street financial firms.   And under our current system, funding for the disability and survivors insurance benefits remains in place. 

Privatization would be guaranteed to have an over-all decline in benefits, and while some might do better, others may end up with less or with nothing at all.   Those who want retirement income over and above what Social Security offers are free to set up a private account to supplement Social Security.  Furthermore, those who wish can lobby for legislation authorizing the Social Security Administration to invest some of the Trust Fund in stocks.   It is not necessary to abolish Social Security as a public program.

Edward Lawrence

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