Social Security: Setting the Record Straight

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Published August 22, 2011

| FOXBusiness

Did you notice that youre paying 2% less in Social Security tax this year? Me neither. Lets see, for a middle income family living on a $50,000 gross income, that works out to $1,000 or a whopping $19.23 per week. Not even enough to feed four at a fast-food joint. Of course, if youre among the nearly 14 million Americans who are unemployed, youre not saving a dime: you dont pay payroll tax if youre not on anyones payroll.(1)

None the less, some of the brainiacs in Washington that we elected thought this was a brilliant idea. Last December it made for excellent headlines: Just the kind of warm and fuzzy gift politicians like to bestow around the holidays. Plus, with elections coming up next year, it has the added benefit of playing well on the campaign trail even though its stupid economic policy.  Telling those who are lucky enough to have jobs to send less money to Social Security, which is already battered by sharply lower collections from three years of high unemployment, is a fabulous idea, wouldnt you agree?

According to the Center for Retirement Research (CRR) at Boston College, last year the recession-induced decline in payroll taxes and surge in benefit claims caused Social Security to pay out more than it collected and that pattern will continue. Not for another year, or even a couple of years. Forever. Where did the extra money come from? The Social Security Trust Fund.

As most of us know, the Trust Fund doesnt really have any funds, i.e. cash.  As predicted years ago by the late Senator Daniel Patrick Moynahan (as well as now Senate Majority Leader Harry Reid, ironically), the trillions of dollars in the Trust Fund proved to be too big a temptation for our elected officials. Over the years, Congress borrowed the money for all sorts of pet projects, replacing the cash with special bonds from the Treasury.

To make up for the shortfall in tax revenue, last year Social Security began tapping the interest on the Treasury bonds held by the Trust Fund. In the words of CRR director Alicia Munnell, this occurred sooner than anticipated. Starting in 2023, Social Security will have to start redeeming the bonds themselves. By 2036, $2.7 trillion in the Trust Fund will be exhausted. At that point, its projected that payroll taxes will cover roughly 75 cents of every dollar in benefits owed.

Of course, theres the question of how the Treasury Department is going to come up with the money to refund the bonds as Social Security cashes them in. However, thats not a Social Security problem--at least not directly--thats a federal government problem!

While were at it, lets dispel the notion that baby boomers are the cause of Social Securitys fiscal problems. The 76 million individuals who make up this generation arent exactly a surprise. In fact, 30 years ago, folks in Washington were already talking about the fact that an unprecedented number of retirees would become eligible to receive full benefits starting this year.  [Full disclosure: I am a baby boomer.]

However, contrary to a widely-held belief, in 1981 President Ronald Reagan did not appoint a blue ribbon panel (headed by future Federal Reserve Chief Alan Greenspan) solely to save Social Security for baby boomers who would be retiring 30 years in the future. Instead, the problem was more immediate: earlier that year, the Trustees report had warned there was a real danger that Social Security might not have sufficient income to pay benefits to current retirees as early as the following year. (2)

Congress eventually enacted legislation incorporating most of the panels recommendations. Among other things, they included:

- Accelerating the already-scheduled increase in the Social Security tax rate. (Since 1990 employers and employees have each contributed 6.2% apiece.)

- Gradually raising the age at which you can collect full Social Security benefit;

- Requiring federal and non-profit workers to join and pay into the system;

-  Requiring that retirees pay income tax on up to 50% of their Social Security benefits if their income exceeds a certain threshold.

To repeat: the Greenspan Commissions goal was to slightly increase the current cushion in the Trust Fund in order to ensure that Social Security could afford to pay benefits both in 1982 and during future cyclical downturns.  Based on interviews with panel members as well as research into written records, Congressional testimony and the methods employed by the panel, Charles Blahaus, who authored the book Social Security: the Unfinished Work, convincingly argues that the accumulation of nearly $3 trillion dollars in the so-called Social Security Trust Fund was an unintended result.(2) Commission members neither foresaw this nor meant the Trust Fund to be a way for Baby Boomers to pre-pay their own retirement benefits. Instead, they envisioned that raising the tax rate to 12.4% (6.2% each from workers and employers) would enable Social Security to continue to successfully operate on a pay-as-you-go basis.

Blahaus also points out that, unfortunately, the mathematical approach used by the Greenspan Commission was flawed. Moreover, it was not aimed at solving the shortfall that- even back then- Social Security was projected to face over the long-term. (3)  According to the Commissions 1983 report, the actuarial imbalance was 1.80% of taxable payroll. In other words, if employers and employees each kicked in another 90 cents on the dollar, Social Securitys financial future would be secure for the next 75 years.

Since politicians hate to utter the words raise taxes, this did not happen. Which is why were 30 years down the road and Social Security is still facing a long-term financing deficit. 

Next week: why the solution is less onerous than you might imagine.

 

1. According to the Bureau of Labor Statistics, last month the nations unemployment rate stood at 9.1%. The share of the eligible population holding a job declined to 58.1%, the lowest since July 1983.

2. Remember where the country stood economically around the time Reagan took office: gas lines and double digit inflation had been the hallmarks of the 1970s; interest rates were in the mid-teens (and killing the housing market); the country had slipped into a recession in the first half of 1980; unemployment averaged more than 7%.

3. The 2011 Trustees Report states that the trust fund has a balance of $2.7 trillion.

4. Read more at http://www.hudson.org/files/publications/1983_Social_Security_Reforms.pdf

 

Ms. Buckner is a Retirement and Financial Planning Specialist at Franklin Templeton Investments. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content. 

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.

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