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Social Insecurity

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The six-member Board of Trustees of Social Security has released its 72nd annual report on the state of Social Security: “The 2012 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.”

The Social Security Act of 1935 requires that the board report annually to Congress on the actuarial status and financial operations of Social Security’s two trust funds.

The Old-Age and Survivors Insurance (OASI) program provides monthly benefits to retired workers, families of retired workers, and survivors of deceased workers. The Disability Insurance (DI) program provides monthly benefits to disabled workers and families of disabled workers.

According to the trustees’ report, at the end of 2011, the combined OASDI program was providing benefits to about 55 million people: 38 million retired workers and their dependents, 6 million survivors of deceased workers, and 11 million disabled workers and their dependents.

The programs are ostensibly funded by employee payroll-tax deductions that are matched by employers. From 1990 to 2010, employers and employees each paid a tax of 6.2 percent on employee earnings, subject to a taxable wage base. That rate was decreased to 4.2 percent for employees beginning only in 2011, but it will return to 6.2 percent in 2013 unless it is renewed by Congress. The taxable wage base has risen steadily from $51,300 in 1990 to $110,100 in 2012. An estimated 158 million people have earnings that are subject to Social Security taxes. Taxes collected in excess of benefits paid are supposed to be put into trust funds and then invested in special interest-bearing, nonmarketable U.S. government securities.

However, there is just one problem: taxes collected no longer exceed benefits paid. According to the official summary of the trustees’ report:

Social Security’s expenditures exceeded non-interest income in 2010 and 2011, the first such occurrences since 1983, and the Trustees estimate that these expenditures will remain greater than non-interest income throughout the 75-year projection period. The deficit of non-interest income relative to expenditures was about $49 billion in 2010 and $45 billion in 2011, and the Trustees project that it will average about $66 billion between 2012 and 2018 before rising steeply as the economy slows after the recovery is complete and the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Redemption of trust fund assets from the General Fund of the Treasury will provide the resources needed to offset the annual cash-flow deficits. Since these redemptions will be less than interest earnings through 2020, nominal trust fund balances will continue to grow. The trust fund ratio, which indicates the number of years of program cost that could be financed solely with current trust fund reserves, peaked in 2008, declined through 2011, and is expected to decline further in future years. After 2020, Treasury will redeem trust fund assets in amounts that exceed interest earnings until exhaustion of trust fund reserves in 2033, three years earlier than projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2086.

But things are actually worse than they appear. Total Social Security expenditures in 2011 were $736 billion. But payroll-tax “contributions” came to only $564 billion. That leaves a deficit of $174 billion. The deficit is said to be only $45 billion because “non-interest income” includes, in addition to payroll taxes, a reimbursement of $103 billion from the general fund of the U.S. treasury in order to “replicate to the extent possible” payments that would have occurred if the payroll-tax reduction had not been enacted and additional revenue of $24 billion from the taxation of Social Security benefits. And Social Security’s total stated income of $805 billion, because it includes $114 billion in nonexistent interest income from nonexistent trust funds, is just an accounting fiction, as is the supposed $2.6 trillion balance in the OASI and DI Trust Funds, since, according to Social Security trustee Charles Blahous, 60 percent of their balances consist of interest credits from the general fund. Every dime paid into Social Security is simply spent by America’s spendthrift Congress. There are no real trust funds or individual taxpayer accounts.

For the combined OASI and DI Trust Funds to remain solvent, the Board of Trustees recommends that lawmakers

  1. increase the combined payroll-tax rate for the period in a manner equivalent to an immediate and permanent increase of 2.61 percentage points (from its current level of 12.40 percent to 15.01 percent);
  2. reduce scheduled benefits for the period in a manner equivalent to an immediate and permanent reduction of 16.2 percent;
  3. draw on alternative sources of revenue; or
  4. adopt some combination of these approaches.

And if they decide, because it would be politically expedient for them to do so, to avoid changes for current beneficiaries and those close to retirement age, lawmakers would “have to make significantly larger changes for future beneficiaries.” Barring any changes, “the Trust Funds would require additional revenue equivalent to $8.6 trillion in present value dollars to pay all scheduled benefits” for the next 75 years.

Social Security should be called Social Insecurity. The program is unstable, unsustainable, and untenable. Yet for millions of Americans it is the only thing they are counting on when they retire. They think it is a retirement plan, an insurance program, or an investment account to which they are contributing premiums instead of an intergenerational, income-transfer, wealth-redistribution welfare program.

Regardless of how much income Social Security might or might not provide in retirement, many Americans choose to supplement their Social Security benefits with a private retirement plan, such as a 401(k) plan.

But according to economist and professor Teresa Ghilarducci of the New School for Social Research in New York City, there is a retirement crisis in America. She believes that you need between 10 and 20 times your annual salary if you want to maintain your current lifestyle when you retire. Yet, 75 percent of Americans approaching retirement in 2010 had under $30,000 in the bank. She also maintains that 401(k) accounts are highly regressive, do not have enough employer contributions, don’t give employees enough choice, have low levels of savings, and usually come with high fees that can erode retirement income.

Ghilarducci wrote an article last month in the New York Times,Our Ridiculous Approach to Retirement,” and was interviewed earlier this month by Robin Young on PRI’s Here and Now (“Is the Retirement System Failing Americans?”). Her book on the subject is When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them, (Princeton University Press, 2008).

Ghilarducci’s solution to the retirement crisis is a new government-run savings plan to supplement Social Security:

My plan calls for a way out that would create guaranteed retirement accounts on top of Social Security. These accounts would be required, professionally managed, come with a guaranteed rate of return and pay out annuities. This is a sensible way to get people to prepare for the future. You don’t like mandates? Get real. Just as a voluntary Social Security system would have been a disaster, a voluntary retirement account plan is a disaster.

In her book, Ghilarducci proposes mandatory contributions of 2.5 percent of income from both employers and employees. The new retirement program would be administered by the government, but the plan assets would remain the private property of each employee. A refundable tax credit of $600 would go to each participant. The program also calls for the government to guarantee a return of at least 3 percent over the rate of inflation.

There is nothing new about all this. The American Socialist Party back in 1928 called for a mandatory government pension system.

The problem with Social Security and Ghilarducci’s proposal is the same problem with all plans to reform, save, or privatize Social Security.

First, they are not voluntary retirement plans that one can enter, control, and leave at will. They are based on coercion, funded by theft, maintained by threats, and dependent on worthless government guarantees. And second, even if they individually or collectively help Americans to ensure that they will have a prosperous retirement utopia, it is not the role of government to provide a retirement plan, a safety net, an insurance program, a savings account, or an investment account. It is that simple. Whether unstable, unsustainable, and untenable or not, the Social Security program — like all welfare programs — should be abolished.

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