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When it Comes to Social Security, "Follow the Money"

Original Article Written on February 26, 2005
 March 12, 2009 updates in Red

In 1980, my friend Mr. Average lamented that his Social Security pension would be small. He wished the government would take more out of his pay and increase his expected pension. This would be difficult as Social Security was having  financial problems and a bipartisan commission had been set up to solve these problems. It recommended, Congress passed, and the President signed a law to increase the social security tax rate, the wages subject to Social Security, and a delay in the normal retirement age. My normal retirement age increased from sixty-five to sixty-six. What have these changes accomplished over the past 25 years?

Social Security Trustees annually update potential fund bankruptcy.  Estimates of Gross Domestic Product, unemployment, immigration, and other relevant variables indicates withdrawals will surpass inputs in 2041. Even though this was better than the 2019 projection date made in 1997,  President Bush says there is a crisis.  A look at the Social Security budget and following the cash will reveal the crisis. 

Baby boomer contributions have made fund deposits higher than fund withdrawals. In 2003 the fund took in an extra 138 billion dollars bringing the total excess to $1.355 trillion. All has been used to buy Treasury Bonds. The fund got paper and the cash went to the Treasury where our Presidents and Congress spent it. They will continue to spend excess cash until sometime 20131 when The Concord Coalition, a deficit watching interest group, estimates cash in minus cash out becomes negative. The 2013 date was increase to 2018, then decrease to 2017 and on March 12, 2009 it was decrease to 2016. So in 2013 (2016) politicians will go from having more to spend to having less to spend. By 2025, the annual cash shortage will be $482 billion. So now the crisis is clear. They want  more cash.

What to do! Options include increasing the wage base being taxed, the tax rate, and delaying the maximum benefit date. All were done in 1981. Ignoring the problem and borrowing the cash will be difficult as borrowing more than we already do will push interest rates higher on Treasuries and lower the value of the dollar.  So again, a bipartisan commission will be formed to increase rates, wages subject to Social Security taxes, and the normal retirement age. A commission shares the political burden. All have been done before. What bothers me is a newly proposed option.

Indexing Social Security to wages has caused Social Security pensions to increase. Wages go up because of inflation and productivity. A plan indexing  pensions to just inflation would lowers pensions and a Presidential/Congressional cash crisis would be avoided for a while. The Center for Retirement at Boston College has analyzed this proposed change. My friend Mr. Average who just retired at 65receives $14,689. Had we indexed to gust inflation in 1951, the average Social Security pension would be lowered by $2,131 to $12,558.  To be candid, my friend Mr. Average needs this additional income.

Let us move ahead to 2025. Under the current system, Mr. Average will receive $16,205 in 2005 dollars, a $1,516 increase.  If indexing only to inflation passes Congress and is approved by the President, Mr. Average will receive only $14,689 in 2005 dollars. No real increase because he would not share in productivity increases. His pension would be larger in 2025, but he could only buy the same amount of goods and services as in 2005.

My liberal side is bothered by the fact that this has even been proposed and the average pension is so low.
My conservative side reminds me, "If we send it, they will spend it."
My cynical side realizes the excess we send is spent to buy votes from constituents.

The Real Story  

The National Academy of Social Insurance reports the problem can be solved for 75 years by immediately increasing the social security tax rate by 1.85%
with half coming from employers and half from employees. The Center for Retirement Research at Boston College reports the entire mess can be solved by increasing the normal retirement age from 67 to 70 or cutting benefits 20% for people under fifty-five years of age. They also report we are living longer in Becoming Oldest-Old: Evidence from Historical U.S. Data. Since Social Security was adopted in 1935, life expectancy for someone 65 has increase from 12 to 17 years. Since these numbers are going up, my friend Mr. Average is making out very well. My normal retirement age is 66 years old. Hopefully I will pay for one more year and collect for than 4 more years.

Epilogue
A final alternative would be to stop investing in  medicine and hope we can lower the life expectancy.

Read Historical Development of Social Security (In Adobe PDF format)
A section from SSA's publication, "Social Security Programs in the United States." (7 pages)
1This date has recently changed to 2018 giving politicians more time to scare people before fixing the problem.