Wednesday, May 04, 2005

The Easy fix to Social Securities' minor problems - by Robert Ball

Robert Ball is the single most authoritative person in the US on the Social security System. He has written a superb Century Foundation Issue Brief. In it he first explains that although the retiring baby boomers may cause a minor problem with Social Security financing after the year 2041, the current administration is playing games with numbers. The statements from the Bush administration are designed to scare, not inform.

Mr Ball then provides a clear, informative explanation of what the problem is, how the administration is trying to scare us into destroying Social Security, and then he offers a simple, relatively painless plan for making Social Security safely fully financed forever.

I - The Scare Numbers

First: The statement "When Social Security started there were 16 people paying in for every one receiving, now it is only 3.3 paying in for each recipient." is a totally misleading statement. When there were 16 people paying in to 1 receiving, the program was only starting and few people were qualified to receive benefits.

The program reached 3.3 people paying for each one receiving in 1975 when all the eligible elderly were receiving, and the ratio has stayed at 3.3 for the last 30 years. That was the planned situation. It is not a problem.

With the baby boom reaching retirement age the ratio is expected to drop for the long run to 2.0 or 1.9 workers to retiree ratio. That is a small problem, nothing more.

Second: The Social Security Administration projects revenue and payments over 75 years because any time further than that is literally unknowable, and anything beyond 20 years or so is unlikely to be very accurate. But the Bush administration is using estimates of what will happen to the program over an infinite future if nothing is done to correct the problems of the baby boom generation and those problem never get solved. That leads to the totally spurious figure of a deficit of $11.1 trillion.

Actually, the shortfall over seventy-five years is a mere 1.92 percent of payroll. Any combination of small income increases (taxes - see solutions) or small benefit reductions can easily cover that deficit. For example, a 1 percent increase in the contribution rate for employees and employers each would totally eliminate the problem. But Bob Ball has a better plan.

Third: The Bush administration keeps saying that if nothing is done "Right Now!" the program will run out of the bonds in the Trust fund in 2041 and the program will be [This is the word Bush uses all the time - it is a lie] Bankrupt!

In fact, the system would be able to continue paying out higher benefits than it pays today, even after inflation is considered. Let's say that again. After all the bonds in the trust fund are cashed in, the FICA tax revenues will still support payment of greater real benefits than are being paid out today, and Social Security can pay this forever.

So what's the problem? Wages will have increased more than inflation, and those higher benefits will only replace a smaller percentage of wages than we plan to replace today. That's not bankrupt. That simply means the plans may need to be changed a little.

II - The simple, painless solution

The following is a quick summary of Bob Ball's suggested solutions taken from his chart. The reader should go to the paper and read the details. The solutions are simple and the writing is clear and easily understood. But here is a brief summary.

Starting point: The seventy-five-year deficit as projected by the trustees’ 2004 middle-range estimate: (+ 1.89)

1. Increase the earnings base; gradually restore the maximum taxable earnings base to 90 percent, the level set by Congress in 1983 - (0.61)

2. Dedicate the residual estate tax to Social Security effective in 2010, with the rate set, as provided for in 2009 under present law, to tax only estates of more than $3.5 million, ($7 million couples) at a rate of 45 percent (- 0.51)

3. Invest assets of the trust funds in stocks, reaching 1 percent of assets at the end of 2006, 2 percent at the end of 2007—up to 20 percent for 2025 and later, but limit assets to 15 percent of the total market value of all domestic stocks (- 0.37)

4. Improve the accuracy of the cost of living adjustment (COLA); in computing the annual COLA, use the Bureau of Labor Statistics’ most recently developed and most accurate Consumer Price Index (CPI), the “chained” index (- 0.35)

5. Make the program universal; cover all state and local government employees hired after 2009 (- 0.19)

6. Increase contribution rate on employees and employers by 0.5 percent each in 2023, when otherwise the ratio of the trust funds at the beginning of a year to the benefits in the following year starts to decline (+ 0.60)

Program kept in balance for many decades beyond the traditional seventy-five years (+ 0.65)

III - So Why the Fuss?

So what's all the fuss about? Simple. George W. Bush wants to privatize Social Security and eliminate the total program. A rational discussion won't get that, so he is wandering the country using the word "Bankrupt" every second sentence and hoping that he can stampede the nation into destroying Social Security just as he stampeded the nation into invading Iraq. Since we know how well his Iraq adventure is working, why should we expect his Social Security adventure to be run any better?

The solutions offered by Mr. Ball assume that the conservative projections used by the Social Security Actuaries are accurate. But if the conservative assumptions on either immigration or worker productivity exceed the numbers used in the projections, there will not be a problem paying even the planned higher benefits in four decades.


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