Fixing Social Security

Coatimundi at Iguazu Falls - photo by JoAnn Sturman

by Michael Burnaugh

What is it? One hundred trillion in unfunded obligations for Social Security and Medicare? And isn’t it true that most of the cost of wars is the pensions and benefits to survivors, and the pensions to retired military? And the double dipping by people who retire from the military at 37 and then earn another pension from another government agency? Why don’t we start the process of solving our sure-to-be-fatal fiscal situation by telling people the truth.

My fellow Americans, my name is Mike and I’m a parasite drawing both SSI and Medicare. In the few years I’ve drawn both, I’ve gotten back more that I put in over my working life. Now forty million baby boomers are wanting to horn in on my deal just as we’re running out of money. This is most inconvenient for me, so I thought of the easiest solution first: Let those on the SSI dole keep on keepin’ on while everyone else has to wait until age seventy. Then, two years later , raise the age to seventy five. I Iike that, but what makes me so special ? Nothing! I’m part of the problem that is killing America.

Here’s what I propose:
1. Raise the age for both SSI and Medicare to seventy five. Period! No benefits until then for anybody.
2. No military pensions until sixty-five.
3. No double dipping. Pick the pension you want the most and draw it at age sixty five.

Tell America the truth about Social Security: It was always a scam—a Ponzi scheme where early participants live off those eligible later. With dropping birth rates, the scheme is easily exposed, End of scam! I remember when the irascible Zell Miller ran for a senate seat in Georgia promising to protect the Social Security lock box which had never existed. Those who have written checks to pay SSI contributions know the deal. The checks are made out to the Treasury Department. They take the money and spend it . There is not one penny put away for any of us. Oddly, I find that comforting. Perhaps I am misguided, but imagine if the government had actually invested all that money and had funded all their obligations. They’d own everything, instead of just the people who depend on them.

It’s time for a Coats lecture on how to unscrew all of this. Nicht Wahr?


Warren Coates replies by referring to:

Saving Social Security?
By Warren Coats, 3/1/2005 6:27:34 AM

Without changes, the Social Security payroll tax will stop raising enough money to meet the system’s pension payment obligations in 2018, just 13 years from now. This funding shortfall can be corrected with only modest adjustments, if action is taken now. Indexing retirement benefits on the consumer price index rather than the average wage increases would eliminate most of the shortfall and modestly and gradually increasing the retirement age a few years would reduce the rest. Other adjustments are also being discussed. The change in the benefit index would reduce the planned increase in benefits and leave the real value of current benefits unchanged. In other words, the financial viability of Social Security can be fixed in a variety of ways and without any draconian measures.

The issue of privatizing or otherwise reforming the nature of the system is another matter all together. Evaluating such reforms calls for a clear understanding of the purposes we wish Social Security to achieve. Before we can intelligently debate whether SS should be a fully funded insurance program (whether with a defined benefit or a defined contribution) or continue as a pay-as-you-go entitlement, we need to debate the role we want it to play in our overall system of retirement income.

Traditionally most Americans’ retirement incomes come from employer based pensions and individual savings (home ownership, whole life insurance, and other investments). Schools taught the need for proper preparations. On August 14, 1935, when the country was still struggling to overcome the Great Depression, President Franklin D Roosevelt added a mandatory government pension when he signed the Social Security Act. In addition to old age pensions, the Act established unemployment compensation, and aid to children and to the ill.

Roosevelt intended for the old age pension provided by Social Security to be a mandatory, defined benefit pension financed by the contributions of the pensioner and his employers over his working life. The system provided a guaranteed minimum pension for those who worked and paid into it. However, the relationship between what a person paid in and ultimately received was never close. Those at or near retirement when the system started were allowed benefits that were financed by young workers who would not draw their own benefits for many years. Pay-as –you-go financing is the cause of the upcoming financing problem as baby boomers swell the ranks of the retired. "As a result, the ratio of workers paying Social Security taxes to people collecting benefits will fall from 3.3 to 1 today to 2.1 to 1 by 2031." It was over 8 in 1955. The tax burden on those currently working is raising fast.

In its current form, Social Security’s old age pension is a complicated structure that is neither a sound insurance or pension scheme nor a well-designed and targeted safety net. The payroll taxes that finance it "account for more than 25% of all federal revenue; its payments represent more than 20% of all federal spending. For almost two-thirds of American’s pensioners, Social Security payments make up over half their income." As a social safety net, it does not target benefits or redistribute income in a clear and defensible way. As a compulsory, government administered pension, it is not financially sound and is considered by many to be an inappropriate and unnecessary government intrusion into private life.

How the system should be reformed, if at all (rather than merely fixing its demographic based financing problems), depends on how as a nation we answer the following questions: "Is Social Security a planning vehicle that an individual uses for his or her own retirement, or is it a pooling of resources so that all of society can meet the needs of its older members? Is it about each person saving for himself, or is it a matter of young helping old and rich helping poor?" Should Social Security be part of the social safety net that Ronald Reagan spoke of for a society in which individuals and families are basically responsible for their own lives, or should it be an instrument of collective social responsibility for public welfare? The attitudes behind different answers to these questions reflect the great divide that has always separated (in varying degrees) Republicans and Democrats. But there may be a proper place for each view.

World Bank research found "that financial security for the old -- and economic growth -- would be better served if governments develop three instruments, or pillars, of old age security: a publicly managed pillar with mandatory participation and the primary goal of reducing poverty among the old; a privately managed, mandatory saving system; and voluntary savings. The first covers redistribution, the second and third cover savings, and all three coinsure against the many risks of old age. By separating the redistributive function from the saving function, the amount of spending in the public pillar---and the tax rate needed to support it---can be kept relatively small. Spreading the insurance function across all three pillars offers greater income security to the old than reliance on any single system."

"A central recommendation of the [World Bank] report is that countries should separate the saving function from the redistributive function and place them under different financing and managerial arrangements in two different mandatory pillars -- one publicly managed and tax-financed, the other privately managed and fully funded -- supplemented by a voluntary pillar for those who want more. "The public pillar would have the limited object of alleviating old age poverty and coinsuring against a multitude of risks. Backed by the government's power of taxation, this pillar has the unique ability to pay benefits to people growing old shortly after the plan is introduced, to redistribute income toward the poor, and to coinsure against long spells of low investment returns, recession, inflation, and private market failures."

For the United States, the World Bank’s advice suggests a much smaller public pillar (the existing Social Security system), targeted on the poor (means tested) whether they had worked and contributed to retirement income or not. It would be financed from the government’s general revenues, not from wages if there were any. This social safety net would be supplemented by the second, mandatory savings pillar, which should sharply limit the need to resort to the first pillar. This mandatory, defined contribution, second pillar would be satisfied by qualifying (and regulated as now) company pension funds, 401K plans, or social security tax contributions to private mutual funds. Reasonable, but not excessive, restrictions and safeguards would be required. Recent experiences with pensioner losses with defined benefit pensions when their employer goes bankrupt indicate that further reforms of the private pension system are still needed as well.

The system would insure that those who could, i.e. those with jobs, would save enough for minimally acceptable levels of retirement income, but would still protect those who had not adequately protected themselves, whether from inability, short sightedness, or bad luck. Allowing workers to manage more of their retirement savings has several advantages. More would be invested in stocks and private bonds, which historically have yielded more on average than government bonds. Such savings would be part of the pensioner’s estate and any unused part would be passed on to his/her heirs. Both the reduction in wage taxes and the real savings of private pensions would tend to increase the supply of labor, increase national savings and investment, and thereby increase economic growth. Fully funded benefits from saving would be free of the demographic problems now besetting our pay as you go system. Benefits from the second tier would be closely related to contributions, which would tend to increase saving (and economic growth) and to be seen as fair. Workers would become capitalists and thus potentially more sensitive to the health of the economy. Those who could not contribute enough, or experience poor returns on their investments would be protected by the first, public pillar.

President George W. Bush’s current proposals for Social Security combine both financial fixes for the existing system and substantive reform of the system by introducing "personal accounts." His recent proposals may be seen as transitional steps to the above system. However, like the existing system, current proposals constitute a mixed and rather incoherent collection of ideas. The final result will be more satisfactory to everyone if the details now being debated contribute to a coherent overall three pillar plan for the provision of retirement income and medical care.

Warren Coats of Warren Coats Consulting provides analysis, advice, and/or technical assistance to central banks, governments, companies or individuals on monetary, payment system, and financial policies and their implementation. He has over 26 years of experience in monetary policy and central banking in developing and transition economies, including working for the International Monetary Fund and as Assistant Director of the Monetary and Financial Systems Department (MFD). He also was a visiting economist at the Board of Governors of the Federal Reserve System and at the World Bank and an assistant professor of economics at the University of Virginia.

To reach him in Arlington, VA,
mailto:WCoats@aol.com

Reprinted from the Hawaii Reporter
http://www.hawaiireporter.com/storyPrint.aspx?1d79fa27-cc7c-4c30-8970-e17d6fd17913