| Social
Security: Safety Net in Need of Repair
By
Marvin L. Stone
AUGUST 2005 - When Social Security was established in 1935,
wages up to $3,000 were taxed at 2%, with the employee and
employer each paying half. Over the years, both the rate
of tax and the wage base have increased; currently, wages
up to $90,000 are taxed at 12.4%. Social Security has also
been expanded to include self-employed individuals, who
pay a tax equal to that paid by the employee plus that paid
by the employer.
President George W. Bush has described Social Security
as a safety net that has a hole in it. The “hole”
can be defined as the impending inability of Social Security
to fulfill its obligations because benefits paid will exceed
both current tax receipts and the sizable reserves ($1.7
trillion at the end of 2004) that have been accumulated
to date. President Bush proposes mending the hole by allowing
workers to invest a portion of the payroll taxes that would
otherwise be paid into the Social Security Trust Fund into
private accounts that would be invested in stocks and bonds.
Unfortunately, diverting funds that would otherwise be paid
into the Social Security Trust Fund into private investments
would increase, not decrease, the size of the hole in the
safety net.
Fostering a system of such private accounts to augment
Social Security is the first step to doing away with Social
Security entirely. While Social Security is not without
its flaws, it has managed to provide a safety net for millions
of Americans for 70 years and can continue to do so with
modest adjustments. Starting down the road to complete privatization
of Social Security is tantamount to throwing out the baby
with the bathwater.
Keeping Social Security solvent requires that the Trust
Fund receive funds at least equal to the benefits it disburses.
While President Bush has repeatedly refused to consider
an increase in the payroll tax rate, there have been indications
that raising the $90,000 income cap on which the tax is
levied might be politically palatable. Increasing that base,
which has been increased every year since 1973, would affect
only those wage earners and self-employed individuals in
upper income brackets. For example, increasing the income
cap from $90,000 to $100,000 would cost a wage earner who
earns $100,000 or more $765 and a self-employed individual
$1,530.
The age at which wage earners can begin receiving Social
Security retirement benefits has been fixed at 65 since
1935. That age is now scheduled to rise to 67. Life expectancy
has increased from 61.7 years in 1935 to 77.3 years in 2004.
As a result, many more Americans are eligible to draw Social
Security benefits. Greater life expectancy has increased
work-life expectancy as well, because Americans tend to
retire much later than was the case in 1935. It is time
to raise the retirement age further, to reduce the outflow
of benefits.
To further improve the solvency of the Trust Fund, Congress
should consider initiating a means test for those receiving
Social Security benefits. To multimillionaires, Social Security
benefits are hardly a safety net. Therefore, limiting the
payment of Social Security benefits to individuals with
incomes of less than, for example, $250,000 per year should
substantially reduce the outflow of benefits from the Trust
Fund. Such a means test should be adjusted annually in step
with changes in the cost of living. A kind of means test
is already applied via the income taxation of Social Security
benefits: Individuals with little income pay no tax on their
Social Security benefits; those with higher income pay tax
on as much as 85% of the benefits received.
Other than payroll taxes, the Social Security Trust Fund’s
only other source of income is interest on its invested
surplus. As of December 31, 2004, that surplus totaled $1.7
trillion. By law, the trustees must lend surplus funds to
the U.S. Treasury. President Bill Clinton suggested in 1999
that the trustees should be permitted to invest the fund’s
surplus in marketable securities as well as in U.S. Treasury
obligations.
President Bush has stated that market investments could
produce a greater rate of return than do the U.S. bonds
currently held by the Trust Fund. Those greater yields should
be earned within the Social Security Trust Fund rather than
within private accounts. It is doubtful that the average
American possesses sufficient knowledge and discipline to
successfully manage the private account suggested by President
Bush. Relying on the established Social Security Trust Fund
management is more likely to provide the desired safety
net over time.
Even if no changes are made in the law governing Social
Security, the Trust Fund will be able to pay promised benefits
until 2042, according to Social Security Administration
actuaries—more than 100 years since Social Security
was originally enacted. While no changes will guarantee
the fund’s solvency forever, by enacting the changes
described above, Social Security may well be able to fulfill
its obligations to the American public for another 100 years.
Marvin L. Stone is a CPA in Denver, Colo.
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