 United States Social Security Card Social Security is a social insurance program administered by the Social Security Administration under the authority of the United States federal government.
Programs
The following programs are provided under the Social Security system:
History
Creation
President Roosevelt signing Social Security Act, August 14, 1935 A limited form of the Social Security program began as a measure to implement "social insurance" during the Great Depression that started following the Black Thursday stock market crash of 1929. The law was passed by Congress at the behest of President Franklin Delano Roosevelt in 1935 as part of the New Deal. Opponents challenged the Social Security Act in court, but it was upheld by a U.S. Supreme Court that had struck down other New Deal legislation. Justice Benjamin N. Cardozo, writing his 1936 majority opinion in Helvering vs. Davis (http://www.ssa.gov/history/court.html), summarized the background that led to the law's passage:
"The purge of nation-wide calamity that began in 1929 has taught us many lessons. Not the least is the solidarity of interests that may once have seemed to be divided. Unemployment spreads from state to state, the hinterland now settled that in pioneer days gave an avenue of escape. ... But the ill is all one or at least not greatly different whether men are thrown out of work because there is no longer work to do or because the disabilities of age make them incapable of doing it. Rescue becomes necessary irrespective of the cause. The hope behind this statute is to save men and women from the rigors of the poor house as well as from the haunting fear that such a lot awaits them when journey's end is near.
Congress did not improvise a judgment when it found that the award of old age benefits would be conducive to the general welfare. The President's Committee on Economic Security made an investigation and report, aided by a research staff of Government officers and employees, and by an Advisory Council and seven other advisory groups. Extensive hearings followed before the House Committee on Ways and Means and the Senate Committee on Finance. A great mass of evidence was brought together supporting the policy which finds expression in the act. Among the relevant facts are these: The number of persons in the United States 65 years of age or over is increasing proportionately as well as absolutely. What is even more important the number of such persons unable to take care of themselves is growing at a threatening pace. More and more our population is becoming urban and industrial instead of rural and agricultural. The evidence is impressive that among industrial workers the younger men and women are preferred over the older. In time of retrenchment the older are commonly the first to go, and even if retained, their wages are likely to be lowered. The plight of men and women at so low an age as 40 is hard, almost hopeless, when they are driven to seek for reemployment. Statistics are in the brief. A few illustrations will be chosen from many there collected. In 1930, out of 224 American factories investigated, 71, or almost one third, had fixed maximum hiring age limits; in 4 plants the limit was under 40; in 41 it was under 46. In the other 153 plants there were no fixed limits, but in practice few were hired if they were over 50 years of age. With the loss of savings inevitable in periods of idleness, the fate of workers over 65, when thrown out of work, is little less than desperate. A recent study of the Social Security Board informs us that "one-fifth of the aged in the United States were receiving old age assistance, emergency relief, institutional care, employment under the works program, or some other form of aid from public or private funds; two-fifths to one-half were dependent on friends and relatives, one-eighth had some income from earnings; and possibly one-sixth had some savings or property. Approximately three out of four persons 65 or over were probably dependent wholly or partially on others for support."
Expansion
Congress subsequently expanded the program in 1939, and again during the 1950s into what is now known as Social Security.
Changes made in 1983
In the early 1980s, there was concern about the long-term prospects for Social Security because of demographic considerations. A commission chaired by Alan Greenspan made several recommendations for addressing the issue. The Social Security payroll tax rate was increased. In addition, provision was made for allowing some Social Security benefits, previously exempt from taxation, to be partially taxable in some instances. [1] (http://www.ssa.gov/history/taxationofbenefits.html)
Commission to Strengthen Social Security (2001)
On May 21, 2001, President George W. Bush formed a 16-member, bipartisan Commission to Strengthen Social Security to suggest proposals for changing social security.
List of legislation
- 1950 - Social Security Amendments PL 81-734
- 1952 - Social Security Amendments PL 82-590
- 1954 - Social Security Amendments PL 83-761
- 1956 - Social Security Amendments PL 84-880
- 1958 - Welfare Pensions Plans Disclosure Act PL 85-836
- 1958 - Social Security Amendments PL 85-840
- 1961 - Social Security Amendments PL 87-64
- 1962 - Welfare Pensions Plans Disclosure Act PL 87-420
- 1962 - Self-Employed Individuals Tax Retirement Act PL 87-792
- 1967 - Social Security Act Amendments PL 90-248
- 1969 - Tax Reform Act PL 91-172
- 1971 - Social Security Amendments PL 92-5
- 1972 - Social Security Amendments PL 92-336
- 1972 - Social Security Amendments (Supplemental Security Income) PL 92-603
- 1973 - Social Security Benefits Increase PL 93-233
- 1974 - Employee Retirement Income Security Act (ERISA) PL 93-406
- 1976 - Tax Reform Act PL 94-455
- 1977 - Social Security Act Amendments PL 95-216
- 1978 - Revenue Act PL 95-600
- 1983 - Social Security Act Amendments PL 98-21
- 1986 - Tax Reform Act PL 99-514
Current operation
Social Security tax
Benefits are funded via a Social Security Payroll tax. This tax is 6.2% of an employee's income paid directly by the employer, and 6.2% deducted from the employee's paycheck, yielding an effective rate of 12.4% of an employee's income. Self-employed people are responsible for the entire tax. This tax is paid only on the employee's first $90,000 (in 2005) of income, beyond which the employee is only responsible for the Medicare portion of the FICA tax rate (1.45% in 2005), although that cutoff increases yearly, indexed to inflation.
Benefits
Social Security can be looked at in a variety of ways, but the most common is to see it as "pay as you go" social and old age insurance. Benefits from the program are paid out according to a detailed formula. The amount of benefits in retirement is typically based on the total accumulation of Social Security Income over a beneficiary's working career.
Social Security Trust Fund
Social Security taxes are paid into the Social Security Trust Fund maintained by the U.S. Treasury. Current year expenses are paid from current Social Security tax revenues. When revenues exceed expenditures, as they have in most years, the excess is spent on general purposes (not related to Social Security), with the amount so spent reflected in non-negotiable bonds that represent a claim on the Treasury on behalf of the Social Security Trust Fund. At the end of 2003, the cumulative excess of Social Security taxes received over benefits paid out stood at more than $1.5 trillion. [2] (http://www.ssa.gov/OACT/STATS/table4a3.html)
Social Security number
A side effect of the Social Security program in the United States has been the near-universal adaptation of the program's identification number, the Social Security number, as a form of unique identification in the U.S. A multitude of U.S. entities use the Social Security number as a personal identifier. These include government agencies such as the Internal Revenue Service, as well as private agencies such as banks, creditors, health insurance companies, and employers. Laws are in place governing acceptable uses for the number; these laws are, however, often unenforced.
Groups not required to pay Social Security
Some small groups of the population are not required to pay Social Security. Primary and secondary school educators have their own pension and disability insurance system that predates Social Security so they are allowed to pay in to their own system instead of the government system. Partly because these funds can be invested in securities, teachers' pension plans tend to be fairly generous.
Demographic and revenue projections
In each year since 1982, OASDI tax receipts have exceeded expenditures, most recently (in 2003) by more than $150 billion. [3] (http://www.ssa.gov/OACT/STATS/table4a3.html) As the "baby boomers" move out of the work force and into retirement, however, it is anticipated that expenses will come to exceed Social Security tax revenues, if taxes are held constant and benefits are increased according to the present cost of living adjustment (COLA) rates. The projections depend on assumptions about rates of immigration, other population changes, economic growth, and productivity.
According to most projections, the Social Security trust fund will begin drawing on its Treasury Notes toward the end of the next decade (around 2018 or 2019), at which time the repayment of these notes will have to be financed from the general fund. At some time thereafter, variously estimated as 2042 (by the Social Security Administration (http://www.ssa.gov/OACT/TRSUM/trsummary.html)) or 2052 (by the Congressional Budget Office (http://www.cbo.gov/showdoc.cfm?index=5666&sequence=0)), the Social Security Trust Fund will have exhausted the claim on general revenues that had been built up during the years of surplus. At that point, current Social Security payroll tax receipts would be sufficient to fund 73 or 78 percent of the promised benefits, according to the two respective projections. The libertarian Cato Institute estimates that the annual shortfall will reach almost $700 billion in today's dollars by 2075. [4] (http://www.socialsecurity.org/pubs/articles/art-biggs010417.html)
The Social Security Administration projects that the demographic situation will stabilize. The current accounts deficit in the Social Security system will have ended, but the system will still require higher levels of revenue as a percentage of GDP and total wages than is currently the case. Recently, this projection has come into question, because of uncertainty about changes in life expectancy. The Social Security Administration forecast, based on a slowing of the rate of increase of life expectancy, is challenged by population experts who predict more rapid increases:
- Tables published by the government's National Center for Health Statistics show that life expectancy at birth was 47.3 years in 1900, rose to 68.2 by 1950 and reached 77.3 in 2002. The latest annual report of the Social Security trustees projects that life expectancy will increase just six years in the next seven decades, to 83 in 2075. A separate set of projections, by the Census Bureau, shows more rapid growth.
("Social Security Underestimates Future Life Spans, Critics Say" (http://www.heraldtribune.com/apps/pbcs.dll/article?AID=/20041231/ZNYT02/412310311)). The Census Bureau projection is that the longer lifespans projected for 2075 by the Social Security Administration will be reached in 2050. Other experts, however, think that the past gains in life expectancy cannot be repeated, and add that the adverse effect on the system's finances may be partly offset if health improvements induce people to stay in the workforce longer.
Actuarial science, of the kind used to project the future solvency of social security, is by nature inexact. The SSA actually makes three predictions: optimistic, mid-line, and pessimistic. The social security crisis that was developing prior to the 1983 reforms resulted from midline projections that turned out to be too optimistic. During the heavy-boom years of the 90s, the midline projections were too pessimistic. Obviously, projecting out 75 years is a significant challenge and, as such, all predictions must be taken with a grain of salt. The actual situation might be much better or much worse than predicted.
Debate over the Future of Social Security
Overview
Retirees who receive Social Security benefits are an important bloc of voters. Indeed, Social Security has been called "the third rail of American politics," in that any politician who touches it may live to regret it, having sparked fears of payouts being cut. No candidate for major office from any political party has suggested that Social Security simply be eliminated, without regard to current or near-future recipients of Social Security payouts.
Currently the Social Security fund is in surplus, revenues from FICA taxes go into the General Fund, if and when FICA taxes are insufficient to pay benefits, which is what current projections show, then revenues from the General Fund will have to be used to pay Social Security Benefits. This will require tax increases, selling other government assets, or borrowing from the private sector. Some have argued that this potential future requires changes to the system. These people argue that Social Security is facing a "crisis" -- Bush described it as a "structural problem" ([5] (http://money.cnn.com/2005/01/11/news/economy/bush_interview.reut/)) and then, in his weekly radio address of January 15, 2005, said that Social Security "is on the road to bankruptcy" ([6] (http://www.guardian.co.uk/worldlatest/story/0,1280,-4735105,00.html)).
Not everyone agrees; the Center for Economic and Policy Research says that "Social Security is more financially sound today than it has been throughout most of its 69-year history" [7] (http://www.cepr.net/publications/facts_social_security.htm). In the view of liberal economist Paul Krugman:
- [T]here is a long-run financing problem.
- But it's a problem of modest size. The [CBO] report finds that extending the life of the trust fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0.54 percent of G.D.P. That's less than 3 percent of federal spending - less than we're currently spending in Iraq. And it's only about one-quarter of the revenue lost each year because of President Bush's tax cuts - roughly equal to the fraction of those cuts that goes to people with incomes over $500,000 a year.
- Given these numbers, it's not at all hard to come up with fiscal packages that would secure the retirement program, with no major changes, for generations to come.
(from "Inventing a Crisis" (http://www.pkarchive.org/column/120704.html), New York Times, Dec. 7, 2004)
Stabilization advocates also say that the projected "deficits" in Social Security are the same as the "prescription drug benefit" enacted in 2002. They say that democraphic and revenue projections might turn out to be too pessimistic--and that the current health of the economy exceeds the assumptions used by the Social Security Administration.
Proposals
Adjustments within the current framework
Stabilization advocates argue that the correct plan is to fix Medicare, which is the largest underfunded entitlement, repeal the 2001-2004 revenue reductions, balance the budget, and then, when a growth trendline emerges from these steps, alter the Social Security mix of taxes, benefits, benefit adjustments and retirement age to avoid future deficits.
The age at which one begins to receive Social Security benefits has been raised several times since the program's inception.
Bush's commission also discussed ways that the system could be adjusted to deal with the projected future deficit without privatization. For example, the income subject to Social Security taxation is capped, with the result that people with higher incomes pay a lower percentage tax than do people with lower incomes. Eliminating the cap would remove this regressive tax feature and would reduce or eliminate the projected deficit. The commission stated:
- Making all earnings covered by Social Security subject to the payroll tax beginning in 2002, but retaining the current law limit for benefit computations (in effect removing the link between earnings and benefits at higher earnings levels), would eliminate the deficit. If benefits were to be paid on the additional earnings, 88 percent of the deficit would be eliminated.
(Social Security Advisory Board report (http://www.ssab.gov/NEW/Publications/Financing/actionshouldbetaken.pdf), July 2001 (rev. ed.), p. 23)
Privatization
The commission appointed by Bush issued a report in 2001 that described three possible models for a change based on partial privatization:
- Two percent of taxable wages would be placed into private accounts for investment (likely in stocks), with the rest of the system unchanged.
- Four percent of taxable wages, up to $1000, would be placed into private accounts for investment.
- One percent of wages would be placed into retirement accounts, and 2.5% would be invested.
Other proposals for privatization range from those initially suggested by Republican candidates in 2000, which involved setting aside an initially small percentage of each worker's payroll tax in a 'lockbox', which the worker would be allowed to invest in securities, to proposals which eliminate the Social Security payroll tax completely for workers born after a certain date and allow workers of different ages different amounts of time for which they could opt to not pay the payroll tax, in exchange for a proportional delay in their receipt of payouts.
Pros and cons of privatization
The use of a social insurance program to pay retirement benefits is not universal, though it has its roots going back into the 19th century, the first was set up by Chancellor Otto von Bismarck in Prussia, as a way of reducing support for socialism. Some nations funnel payroll taxes into equities, and retirees then draw on these equities. Such systems are referred to as "privatization". Currently, the United Kingdom, Sweden and Chile are the most frequently cited examples of privatized systems, and the experiences in this countries is being debated as part of the current Social Security controversy.
Several questions posed by privatization are: 1) how much risk should workers be forced to bear, 2) what rewards do they get for bearing them, and 3) what happens to those whose risks turn out badly. To privatization advocates, individuals are the best deciders of how much risk they should undertake with their retirement funds, where as stabilization proponents argue that if those risks turn out badly, there will be a political push to raise state benefits, which means that the "risks" are without moral hazard.
Supporters of the current system maintain that the mixture of low risks, low management costs, and the social insurance nature of the system provide the best coverage for the function of social security: a baseline income derived from savings. From their perspective, the major weakness of any individual retirement account system, is that many of those individually managed accounts will fail to return at all, or even will suffer a reduction in the capital put in. They point to the fees which absorb significant fractions of the savings in Chile and the United Kingdom as examples of this, where as much as 30% of savings can be asborbed by fees. Since social security is passively managed, it is invested only Treasury bonds, its management costs are very low. Critics of this viewpoint, even some who do not support privatization, worry about the potential ramifications of having an undiversified Social Security portfolio, many of them support investment in equities through a government pension plan, similar to CALPERS.
Libertarians commonly criticize social security for returning at a lower rate than other investments, however, their numbers ignore the cost of borrowing for privatization, and the costs of insuring the increased risks that privatization would create. Advocates of privatization, such as the Cato Institute and the American Enterprise Institute criticize the system as being similar to the illegal Ponzi pyramid scheme. [8] (http://www.socialsecurity.org/daily/05-11-99.html) Social Security's supporters state that it is only a Ponzi scheme if the United States intends to repudiate its debts, and, in fact, under US law it is illegal for government officials to "impugn the credit" of the United States, that is, it is technically illegal for goverment officials to even suggest that such action would be taken.
Privatization of state-run old-age pension systems has occurred in several states throughout the world. For example, in Chile, under a system instituted by former dictator Augusto Pinochet, workers are required to pay a certain percentage of their earnings into a retirement account that they could invest in certain approved forms of securities. Withdrawals before retirement are prohibited, but the funds in the retirement accounts belong to the individual worker and can even be passed on to the worker's heirs at time of death. This approach was akin to the Republicans' "lockbox" proposal, but more comprehensive a change. Many Chilean workers have found their retirement incomes to be inadequate. [9] (http://www.nytimes.com/2005/01/27/business/worldbusiness/27pension.html?) Critics of privatization point out that in states where "privatization" has occurred, costs of the state pension system have risen, because while some workers do better, others do worse, creating increased strain on anti-poverty programs; the United Kingdom is cited as an example of this problem. Another problem in the United Kingdom is the burden on private pensions. The National Association of Pension Funds has praised the "efficiencies of scale" of the U.S. Social Security program. [10] (http://www.prospect.org/web/page.ww?section=root&name=ViewWeb&articleId=8997)
In the late 1990s, privatization had advocates that argued that Social Security was missing out on the high rates of return of the stock market in the 1990s, and argued that Private Retirement Accounts be used in analogy to the IRAs and 401(k) plans. The sharp crash of the stock market in 2000-2002 and the abandonment of the issue moved talk of Social Security reform to the back burner, but several influential organizations, most notably the Cato Institute, continued to consider it a crucial issue. After the 2004 election, Bush discussed privatization as one of his goals for his second term.
Privatization has been criticized on the grounds that it would cause substantial cuts in guaranteed benefits, only part of which could be made up by earnings on a private account, and would greatly increase the amount spent on administrative expenses. [11] (http://www.cepr.net/publications/facts_social_security.htm)
Some liberals argue that the ultimate goal of the Republican Party is the elimination of Social Security, in contradiction to Bush's claim of wishing to reform the system. As half of Social Security is paid through a 6.2% income tax that comes directly from the employer, this would have the side effect of decreasing the tax burden on corporations.
The other major sector of opinion is that privatization accomplishes nothing, that rational investors would neutralize any benefit of, effectively, selling Treasury Notes and buying equities (See Modigliani-Miller Theory) - that it places more risk on individual workers than it gives back in rewards, since they cannot effectively vote their shares, but have no more protection than any other owner of common stock - and that it does nothing to change the budget situation in the future, that if and when the trust fund runs out, there will still be the choice of raising taxes or cutting benefits, or both.
Believers in this position argue that "privatization" is a fraud, that there is no specific Social Security Crisis, but instead a general budget crisis: namely that the US General Fund is in persistent deficit, that revenues are far too low to cover expenditures, and that absent this problem being solved, it does not matter how social security is set up. Plans such as the Diamond-Orszag plan propose stabilization of Social Security, by gradually ending the process of the General Fund being able to borrow from payroll taxes. This requires increased revenues devoted to social security. Their plan, as with other social security stabilization plans, relies on gradually increasing the retirement age, raising the ceiling on which people must pay FICA taxes, and slowly increasing the FICA tax rate to a peak of 15% total as opposed to 12.4%.
Stabilization advocates argue that when the risks, overhead costs and borrowing costs of any "privatization" plan are taken together, the result is that such a plan has a lower expected rate of return than "pay as you go" systems. They point out the high overheads of "privatized" plans in England and Chile, and that while "risk for reward" applies to the individual, the macro picture means that for every winner, there will be losers, and the government will be responsible for preventing those losers from slipping into poverty. This will mean an increase in expenditures for anti-poverty programs for the elderly, as it has for both Chile and Argentina.
Bush's proposal
As of late 2004, Bush has stated that one of his top legislative priorities for 2005 is a major change in the Social Security system. Although the details have not yet been announced, it is expected that he will propose a plan that would channel some of the payroll tax receipts into what are called Private Retirement Accounts, though the administration is now leaning towards the term "personal accounts". [12] (http://www.alternet.org/story/21111/) Current retirees and those soon to retire would see little change, but later retirees would receive lower benefits.
Major components
The Bush proposal is expected to include a partial privatization arrangement, in which individual workers would be allowed to choose to divert some portion of the payroll taxes they pay into an individual account. To continue to pay benefits to current retirees despite this drop in current payroll tax receipts available for the purpose, the government would borrow the difference, estimated to be at least a trillion dollars over the course of the phasing-in period. In addition, benefits would be cut by being indexed to prices rather than wages.
According to the Congressional Budget Office's (http://www.cbo.gov/showdoc.cfm?index=5666&sequence=0) analysis of this plan, virtually all of the projected savings would come from adjusting future benefits to keep pace with the rate of price Inflation rather than to keep pace with the rate of wage inflation. (The heart of the question of whether Social Security should be indexed to prices or wages is whether Social Security should ensure retirees have a consistent standard of living (price indexing), or whether the program should ensure they have a constant standard of living relative to the current workers (wage indexing)).
|
Add individual accounts with offsets | Change benefit calculation to price indexing
|
| 0.00 | 0.00
|
| -0.67 | 0.38
|
| -0.22 | 1.30
|
| 0.11 | 2.33
|
| 0.17 | 3.21
|
| 0.22 | 3.99
|
Source: Congressional Budget Office, expressed as a percentage of GDP.
Substance of the dispute over Bush's proposal
Bush's proposal, according to its supporters, will allow the government to cut money spent on benefits in the future, and thus spare a "crisis" in Social Security, which would occur when it exhausts its "trust fund" surplus in 2042, according to the SSA or 2052, according to the CBO.
Opponents, citing the CBO analysis, argue that the upfront borrowing costs mean that this plan would not produce a lower total deficit in the Social Security fund against current law until around 2030. The expected savings projected do not include interest on this debt nor the benefit of paying back the debt in cheaper (inflated) dollars, nor is the expected borrowing figured into their GDP and productivity assumptions in the model. Vice President Dick Cheney stated that the plan would require borrowing $758 billion over the period 2005-2014, although that estimate has been criticized as being unrealistically low. [13] (http://www.talkingpointsmemo.com/archives/week_2005_02_06.php#004709)
The second proposal emerged as the one preferred by the Bush Administration. This plan would result in high transition costs, with the midline estimates to be in the vicinity of over $2 trillion over 10 years. For workers, privatization would mean smaller social security checks, with the likelihood based on historical returns of increased compensation from returns on investments. There is debate over the advisability of subjecting workers' retirement money to market risks.
Politics of the dispute over Bush's proposal
Bush made social security reform a major issue in the 2004 elections, and has made clear that he intends to work to privatize social security in his second term. To assist that effort, Republican donors were asked after the election to help raise $50 million or more for a campaign in support of the proposal, with contributions expected from such sources as the conservative Club for Growth and the securities industry. [14] (http://www.alternet.org/columnists/story/20916) (In 1983, a Cato Institute paper had noted that privatization would require "mobilizing the various coalitions that stand to benefit from the change, ... the business community, and financial institutions in particular ..." [15] (http://zfacts.com/p/486.html)) Soon after Bush's State of the Union speech, the Club for Growth began running television advertisements in the districts of Republican members of Congress whom it identified as undecided on the issue. [16] (http://www.clubforgrowth.org/blog/archives/018507.php?PHPSESSID=a5310ef74ae1efc9b9e5f973a3107dd7)
On January 16, 2005, the New York Times reported internal Social Security Administration documents directing employees to disseminate the message that "Social Security's long-term financing problems are serious and need to be addressed soon," and to "insert solvency messages in all Social Security publications". [17] (http://www.nytimes.com/2005/01/16/politics/16benefit.html?oref=login&hp&ex=1105851600&en=8adcb7ce5d74cac7&ei=5094&partner=homepage) Coming soon after the disclosure of government payments to commentator Armstrong Williams to promote the No Child Left Behind Act, the revelation prompted the objection from Dana C. Duggins, a vice president of the Social Security Council of the American Federation of Government Employees, that "Trust fund dollars should not be used to promote a political agenda."
Opponents of Bush's plan have analogized his dire predictions about Social Security to similar statements that he made to muster support for the 2003 Invasion of Iraq; see, for example, this advertisement (http://cdn.moveon.org/content/pdfs/SocialSecurity_WMD.pdf) (80k external PDF file).
See also
External links
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