Like the misinformed premature rumors of Mark Twain’s death a century ago, the demise of Social Security is greatly exaggerated. Depending on who you listen to, Social Security is already bankrupt or will be in less than 10 years. This uninformed rumor has reared its ugly head nearly every election cycle over the last 30 years. The truth is not so negative and not as complicated as many whose wishful thinking for this Great Depression era program to end would hope.
The economic collapse of 1929 wreaked havoc on American fortunes across the board. 1 in 4 people lost their jobs and savings accounts were wiped out. Especially hard hit were the elderly whose limited resources disappeared as over 10,000 banks went into failure, robbing them of what little they had set aside for their late years in life. It has been estimated that in 1934 over half of the elderly in America lacked sufficient income to be self-supporting.
Social Security in its early days was set up as a hedge against the inadequacies of an economic system that failed to provide a living wage and allow many workers to set enough aside to provide for their needs as they became removed from the work force. As our more urban and industrial society moved away from an agrarian economy, the extended family that took care of their aging parents started to disappear as children moved away from home to seek independent lives. Many elderly became renters rather than owners and relied on the services of strangers to provide the resources they had been able to provide for themselves on their small farms and ranches.
As the ability to fall back on assistance from family and a close-knit community disappeared, the elderly had no real resources to generate the revenue it required to buy the food, clothing, housing and heating fuel they needed. Many European countries had already been addressing the needs of the poor, especially the elderly. Theodore Roosevelt was an early champion of a system in this country that would fend off the “crushable elements at the base of our present industrial structure” that robs the elderly from “the human wreckage due to its wear and tear, and the hazards of sickness, accident, invalidism, involuntary unemployment, and old age”. But it was not until Teddy’s cousin Franklin came along and made The Social Security Act of 1935 part of his New deal agenda did this serious issue finally get the attention it needed. It was set up as an insurance program where workers paid into it and would collect benefits at age 65 or older. After some 30 million social security numbers were assigned a special trust fund was set up to collect dedicated revenues from the first Federal Insurance Contributions Act (FICA) taxes, beginning in January 1937.
It’s a self-sustaining program that over the years has collected over $13 trillion while paying out $10.6 trillion in benefits. During lean years when revenues shrank due to high unemployment the surpluses that Social Security has acquired and earned interests on covered not only a growing number of recipients but was able to provide cost of living increases over the years. According to an Op-Ed piece by Nobel Prize-winning economist Paul Krugman, “Social Security has been running surpluses for the last quarter-century, banking those surpluses in a special account, the so-called trust fund. The program won’t have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted, which the program’s actuaries don’t expect to happen until 2037 – and there’s a significant chance, according to their estimates, that that day will never come.” (Attacking Social Security, by Paul Krugman, NYTimes, 8/15/10)
So where does the notion come from that Social Security is failing? In part it is due to the misunderstanding about how the social security funds collected from our payroll checks affect the larger U.S. economy. Social Security, along with Medicare and Medicaid make up the largest share of the government’s total outlays. But as a stand-alone entity SS outlays are no bigger than current Defense Dept. outlays. According to the CBO Social Security is considered to be an “off-budget” Treasury account. It is the rising health care costs in this nation that affect Medicare and Medicaid, impacting future deficits and by default dragging the SS program into the fray.
The anti-tax crowd within conservative ranks wants to eliminate this program as a part of their overall campaign to keep “big government” out of our private lives. Yet as an insurance program, the plan pays for itself much like it would in the private sector. The benefit for a federally insured program though is that costs are kept low and benefits high because overhead expenses are minimal and there is no profit motive to eat away at the premiums workers pay into this program.
Social Security will face some rough times in the coming years because a large segment of society known as the port WWII baby boomers are retiring and the demand for benefits will increase. Also, in these tough economic times older people are being laid off or forced to retire due to a shrinking economy, creating an even greater burden on SS benefits as many of these people choose to opt-in to the system early. The impact of this though as Paul Krugman points out is that it will only “cause the cost of paying Social Security benefits to rise from its current 4.8 percent of G.D.P. to about 6 percent of G.D.P.” – over the next 20 years. This is less than what the rise in defense spending has been since 2001 and yet there has been no hue and cry from conservatives about cutting defense spending to get the deficit under control.
Even though there will be a higher proportion of retirees vs. work force over the next decade or so, past SS surpluses that were set aside should help to adjust for this for at least until 2037. After this, until some corrections are made, the system will still be able to pay out about 75% of previous benefits for another 20-30 years. Had the previous Bush administration not taken such a cavalier approach towards deficits by cutting taxes for the wealthiest 2% or engaged in an unnecessary war in Iraq funded by loans from China and others, the budget surplus that existed prior to 2001 would have been enough to offset the strain on a system caused by a large increase of retirees.
However, if current CBO projections for reducing the deficit are correct from savings we can gain from reducing health care costs as a result of the recently passed health care legislation, there is a good likelihood that there will be adequate funds for retirees well into the future. An additional $300 million in savings will begin March 1st, 2011 as paperless payments are initiated – direct deposits into your checking account or through a government Direct Express Debit MasterCard. Further deficit reductions can occur too if the Congress is wise enough to allow the deficit-raising Bush tax cuts to expire at the end of this year, especially for the wealthiest 2%.
We can make some simple adjustments to make sure that future generations are not going to be rejected when their time comes to cash in on what they have been contributing to all their working life. As life expectancy increases and the technology we develop keeps older people healthier and living longer, it may be necessary to increase retirement ages for collecting SS benefits. It may also be necessary that as wealthier retirees enter into the system that their benefits be reduced at a rate commensurate to private retirement benefits they have been able to set aside. A report released in May this year by the Senate Special Committee on Aging found “that relatively minor tweaks could put the trust fund back on sound financial ground” through 2085.(“Ten Things You Should Know About Social Security” by the U.S. News & World Report)
The economic hardship for many families to help their aging parents is reduced significantly by the benefits paid out to our senior citizens through the social security system. The benefits have prevented many people from living in squalor and dying earlier deaths had they not had this safety net in place. These government secured benefits are literal life-lines for a segment of society that are at the tail end of an economic system where being able to save for the future is extremely difficult. People need to feel secure in their old age that after working hard all of their lives there is a safety net out there they’ve contributed to and will not disappear as a result of insecure risky investments in a volatile free market.
The program serves as a stick in eye for the anti-government crowd that insists that “the government is not the solution to the problem, it is the problem”. It’s a program that is alive and well and has been for 75 years. Its trust fund must be safeguarded to insure it is not raided for self-serving purposes that take the dedicated contributions to it and spend it on corporate wish list items, widening even further an income gap between the haves and the have-nots.
Historical Background and Development of Social Security
Ten Things You Should Know About Social Security