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Friday, May 06, 2005
Social Security

I believe that social security reform is crucial and perhaps the greatest socio-economic problem facing our nation. The program is horrible and history shows that it has been screwed up since its inception. Our generation ('X') is the first to be truly willing to tackle its reform for a variety of reasons - compared to ANY prior generation, we have a better understanding of investing and planning our own retirement, our generation has a higher percentage of people invested in the stock market than any other, and with baby boomers retiring (soon to have two workers for every retiree), we fear tax increases (oops, I'm always told the 4+% taken out of my paycheck for Social Security or 2x when I was self-employed is not a tax) and/or the impact that no reform could have on the market and economy. We cannot receive full benefits until age 67, and we know that the true return on the investment is poor - most can do better investing the money on their own for the return that we will get - if any. I often get angry at the selfishness of the responses heard when you try to discuss SS reform with anyone older. Many admit that the program is poorly set up, unfair, and acknowledge that they will take out far more in their retirement (current average recipient takes out what they paid in WITH interest in 3 1/2 years). "Don't care if its unfair, unjust, wrong, unethical, etc. etc. Don't care if they have to raise YOUR taxes, or that you may not get a benefit. Don't you dare touch my benefit, make me pay more, or reduce my benefits. I need them. It's mine after all. I paid in! I was promised!" In my libertarian bend, I don't understand the constitutional justification for social security and Medicare. I would love to know if there was ever a court challenge to its validity. I often threaten that if I ever win the lottery that I will sue the fed. to get all of my "contributions" back. Could you imagine the what would happen if I won? It scares the crap out of my parents friends. My folks know enough to ignore me. As you may recall, President Clinton had taken up the start of the discussion, but just as soon as he had started the issue regarding the intern overshadowed his efforts. Interesting read follows. It is a 2003 article from Will Marshall, president of the Progressive Policy Institute - the Democratic Leadership Council think tank.

Social Security: Fix It Now
March 21, 2003
By Will Marshall

Although it was overshadowed by President Bush's ultimatum to Saddam Hussein, the Social Security trustees this week issued a sobering report that demands policymakers' attention. The report finds that the gap is widening between payroll tax revenues and the benefits Social Security has promised to retirees over the next 75 years. And embedded in the annual report's dry, statistic-laden prose is an unmistakable warning: If Congress fails to act now, the costs of fixing Social Security's problems will be significantly larger down the road.

Here are the basic facts. Between 2010 and 2030, roughly 80 million baby boomers will turn 65, dramatically raising both Social Security and Medicare costs. Social Security alone will grow from 4.4 percent of GDP today to 6.4 percent in 2030. The system's trust fund will be exhausted by 2042. That may seem like a long way off, and indeed some Democrats have pointed to the trust fund's reserves as evidence that the system is fine, at least for now. But the trustees make it clear that such complacency is unwarranted.

The real date to watch is 2018, when Social Security's annual costs begin to exceed its tax revenue. To keep paying benefits, the trust fund will have to cash in IOUs issued by the U.S. Treasury, which has been borrowing from Social Security to finance other federal programs. Treasury, in turn, will either have to raise taxes or borrow money from someone else to pay back the trust fund. In either case, U.S. taxpayers will pick up the tab, now or later. In other words, the trust fund's "assets" are really the federal government's financial liabilities. Between 2018 and 2042, we will have to tap general revenues to make up the difference between payroll taxes and benefit checks. After that, how the system meets its obligations to older Americans is anyone's guess.

In short, "doing nothing" to fix the system today is actually a policy choice. It is a tacit vote for a backdoor tax increase to keep the system solvent. This puts the entire burden of "saving" Social Security on young working families. How big a burden? The trustees estimate that, to keep the trust fund solvent over 75 years, the payroll tax rate would have to rise by 1.92 percentage points, or benefits would have to be cut by 13 percent, or the federal government could transfer $3.5 trillion in general revenue to Social Security, or some combination of the three. But these steps would have to happen immediately, otherwise the costs of making Social Security solvent will grow even larger.

Let's suppose, for example, that Congress decides to do nothing until 2018, and then start gradually raising tax rates to match the surge in spending on benefits. According to the trustees, payroll taxes would have to be 2.5 percentage points higher than today in 2025, 3.7 percentage points higher in 2030, and 4.3 percentage points higher by 2035. The tax rates would keep rising after that, to 5.8 percentage points above today's level by 2065, or a total of nearly 20 percent of payroll.

The trustees don't actually call for such increases, but merely use them to illustrate the long-term deficit facing Social Security. In fact, big hikes in payroll taxes would be the worst way to solve the problem. That's because the payroll tax is a regressive levy on labor. It takes a bigger bite of the earnings of low- and middle-income workers than affluent ones. Most working Americans pay more in payroll taxes than income taxes. And because it raises labor costs, a high payroll tax gives employers disincentives to hire new workers.

The report offers no support for liberal claims that Social Security faces no problems that a little more economic growth won't solve. Under the most optimistic set of economic and demographic assumptions, the gap between payroll tax rates and Social Security outlays would be smaller, but it would not disappear. For example, the projected gap between outlays and revenues in 2035 shrinks from 4.3 percent of payroll under the trustees "intermediate" assumptions to 1.7 percent under the "low cost" assumptions. (Under the trustees' "high cost" assumptions, the gap in 2035 is a staggering 7.3 percent of payroll.)

It's also important to point out that the trustees report focuses only on the fiscal health of Social Security. It doesn't address the critical, structural problems facing Social Security: dwindling retirement benefits as the ratio of workers to retirees drops and as medical advances add years to life. With the boomers' retirement just around the corner, you'd think all this would be a subject of lively debate in Congress. That it hasn't been can only be regarded as a massive evasion of political responsibility.

While President Bush has promised to give Social Security reform high priority, the commission he formed in 2001 struck Democrats as tilted toward advocates of "privatization." Democrats' failure to turn the 2002 midterm election into a referendum on privatization -- diverting some portion of payroll taxes into personal savings accounts owned and managed by workers -- highlights the limits of a "just say no" approach to Social Security reform.

It's time to move beyond the phony war on privatization and start focusing on what needs to be done to restore confidence in the basic financial integrity of America's biggest and most important social insurance program.

My plan: First, I dismantle the Social Security program. Second, out of my own desire and also perhaps for self preservation, I form my own island nation.

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