This article concerns proposals to change the Social Security system in the United States.
Social Security
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...
is a
social insurance
Social insurance is a form of social welfare that provides insurance against economic risks. The insurance may be provided publicly or through the subsidizing of private insurance. In contrast to other forms of social assistance, individuals' ...
program officially called "Old-age, Survivors, and Disability Insurance" (OASDI), in reference to its three components. It is primarily funded through a dedicated
payroll tax
Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their employees. By law, some payroll taxes are the responsibility of the employee and others fall on the em ...
. During 2015, total benefits of $897 billion were paid out versus $920 billion in income, a $23 billion annual surplus. Excluding interest of $93 billion, the program had a cash deficit of $70 billion. Social Security represents approximately 40% of the income of the elderly, with 53% of married couples and 74% of unmarried persons receiving 50% or more of their income from the program. An estimated 169 million people paid into the program and 60 million received benefits in 2015, roughly 2.82 workers per beneficiary.
Reform proposals continue to circulate with some urgency, due to a long-term funding challenge faced by the program as the ratio of workers to beneficiaries falls, driven by the aging of the
baby-boom generation, expected continuing low
birth rate
The birth rate for a given period is the total number of live human births per 1,000 population divided by the length of the period in years. The number of live births is normally taken from a universal registration system for births; populati ...
, and increasing
life expectancy
Life expectancy is a statistical measure of the average time an organism is expected to live, based on the year of its birth, current age, and other demographic factors like sex. The most commonly used measure is life expectancy at birth ...
. Program payouts began exceeding cash program revenues (i.e., revenue excluding interest) in 2011; this shortfall is expected to continue indefinitely under current law.
Social Security has collected approximately $2.8 trillion more in payroll taxes and interest than have been paid out since tax collection began in 1937. This surplus is referred to as the
Social Security Trust Fund. The fund contains non-marketable
Treasury
A treasury is either
*A government department related to finance and taxation, a finance ministry.
*A place or location where treasure, such as currency or precious items are kept. These can be state or royal property, church treasure or i ...
securities backed "by the full faith and credit of the U.S. government". The funds borrowed from the program are part of the total
national debt
A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
of $18.9 trillion as of December 2015. Due to interest, the Trust Fund will continue increasing through the end of 2020, reaching a peak of approximately $2.9 trillion. Social Security has the legal authority to draw amounts from other government revenue sources besides the payroll tax, to fully fund the program, while the Trust Fund exists. However, payouts greater than payroll tax revenue and interest income over time will liquidate the Trust Fund by 2035, meaning that only the ongoing payroll tax collections thereafter will be available to fund the program.
There are certain key implications to understand under current law, if no reforms are implemented:
* Payroll taxes will only cover about 79% of the scheduled payout amounts from 2034 and beyond. Without changes to the law, Social Security would have no legal authority to draw other government funds to cover the shortfall.
* Between 2021 and 2035, redemption of the Trust Fund balance to pay retirees will draw approximately $3
trillion
''Trillion'' is a number with two distinct definitions:
*1,000,000,000,000, i.e. one million million, or (ten to the twelfth power), as defined on the short scale. This is now the meaning in both American and British English.
* 1,000,000,000,00 ...
in government funds from sources other than payroll taxes. This is a funding challenge for the government overall, not just Social Security. However, as the Trust Fund is reduced, so is that component of the
National Debt
A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
; in effect, the Trust Fund amount is replaced by
public debt outside the program.
* The
present value
In economics and finance, present value (PV), also known as present discounted value, is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money has inte ...
of unfunded obligations under Social Security was approximately $11.4 trillion over a 75-year forecast period (2016-2090). In other words, that amount would have to be set aside in 2016 so that the principal and interest would cover the shortfall for 75 years. The estimated annual shortfall averages 2.49% of the payroll tax base or 0.9% of
gross domestic product
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is of ...
(a measure of the size of the economy). Measured over the infinite horizon, these figures are 4.0% and 1.4%, respectively.
* The annual cost of Social Security benefits represented 4.0% of
GDP in 2000 and 5.0% GDP in 2015. This is projected to increase gradually to 6.4% of GDP in 2035 and then decline to about 6.1% of GDP by 2055 and remain at about that level through 2086.
President Barack Obama opposed
privatization
Privatization (also privatisation in British English) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when ...
(i.e., diverting payroll taxes or equivalent savings to private accounts) or raising the retirement age, but supported raising the annual maximum amount of compensation that is subject to the Social Security payroll tax ($137,700 in 20) to help fund the program. In addition, on February 18, 2010, President Obama issued an executive order mandating the creation of the bipartisan
National Commission on Fiscal Responsibility and Reform
The National Commission on Fiscal Responsibility and Reform (often called Simpson–Bowles or Bowles–Simpson from the names of co-chairs Alan Simpson and Erskine Bowles; or NCFRR) was a bipartisan Presidential Commission on deficit reduction, ...
,
[Exec. Order No. 13,531, 75 Fed. Reg. 7,927 (Feb. 23, 2010).] which made ten specific recommendations to ensure the sustainability of Social Security.
[The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, National Commission on Fiscal Responsibility and Reform 48–53 (Dec. 2010), available at http://www.fiscalcommission.gov/news/moment-truth-report-national-commission-fiscal-responsibility-and-reform]
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
Chairman
Ben Bernanke
Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Fed, he was appointed a distinguished fellow at the Brookings Institution. Duri ...
said on October 4, 2006: "Reform of our unsustainable entitlement programs should be a priority." He added, "the imperative to undertake reform earlier rather than later is great."
The tax increases or benefit cuts required to maintain the system as it exists under current law are significantly higher the longer such changes are delayed. For example, raising the payroll tax rate to 15% during 2016 (from the current 12.4%) or cutting benefits by 19% would address the program's budgetary concerns indefinitely; these amounts increase to 16% and 21% respectively if no changes are made until 2034.
During 2015, the
Congressional Budget Office
The Congressional Budget Office (CBO) is a List of United States federal agencies, federal agency within the United States Congress, legislative branch of the United States government that provides budget and economic information to Congress.
Ins ...
reported on the financial effects of various reform options.
Background on funding challenges
Overview
Social Security
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...
is funded through the
Federal Insurance Contributions Act tax (FICA), a payroll tax.
Employers and employees are each responsible for making tax payments of 6.2% of wages in 2018 (12.4% total) as FICA contributions, typically withdrawn from paychecks. Non-employee contractors are responsible for the entire 12.4%. During 2018, Social Security taxes were levied on the first $128,400 of income for employment; amounts earned above that are not taxed. Covered workers are eligible for
retirement
Retirement is the withdrawal from one's position or occupation or from one's active working life. A person may also semi-retire by reducing work hours or workload.
Many people choose to retire when they are elderly or incapable of doing their j ...
and
disability
Disability is the experience of any condition that makes it more difficult for a person to do certain activities or have equitable access within a given society. Disabilities may be cognitive, developmental, intellectual, mental, physical, ...
benefits. If a covered worker dies, his or her spouse and children may receive survivors' benefits. Social Security accounts are not the property of their beneficiary and are used solely to determine benefit levels. Social Security funds are not invested on behalf of beneficiaries. Instead, current tax receipts are used to pay current benefits (the system known as "
pay-as-you-go"), as is typical of some insurance and defined-benefit plans.
In each year since 1983, tax receipts and interest income have exceeded benefit payments and other expenditures, in 2009 by more than $120 billion. However, without further legislation, or change in benefits, this annual surplus will change to a deficit around 2021, when payments begin to exceed receipts and interest thereafter. The fiscal pressures are due to
demographic
Demography () is the statistical study of populations, especially human beings.
Demographic analysis examines and measures the dimensions and dynamics of populations; it can cover whole societies or groups defined by criteria such as ed ...
trends, where the number of workers paying into the program continues declining relative to those receiving benefits.
Demographics
The number of workers paying into the program was 5.1 per retiree in 1960; this declined to 3.3 in 2007 and is projected to decline to 2.1 by 2035. Furthermore, life expectancy continues to increase, meaning retirees collect benefits longer. Federal Reserve Chairman Bernanke has indicated that the aging of the population is a long-term trend, rather than a proverbial "pig moving through the
python".
The number of program recipients was 60.9 million in 2016, up approximately 0.9 million from 2015. The number receiving retirement benefits rose by 1.2 million, while the number receiving survivors and disability benefits fell by a total of approximately 0.3 million.
Social Security Trust Fund
Social Security payroll taxes and interest received are added to the Fund, while expenses (payments to recipients) are deducted from the Fund. For example, during 2016, the initial balance as of January 1 was $2,780 billion. An additional $710 billion in payroll tax revenue and $87 billion in interest added to the Fund during 2016, while expenses of $776 billion were removed from the Fund, for a December 31, 2016 balance of $2,801 billion (i.e., $2,780 + $710 + $87 - $776 = $2,801).
The accumulated surpluses are invested in special non-marketable
Treasury securities
United States Treasury securities, also called Treasuries or Treasurys, are government debt instruments issued by the United States Department of the Treasury to finance government spending as an alternative to taxation. Since 2012, U.S. go ...
(treasuries) issued by the U.S. government, which are deposited in the
Social Security Trust Fund. At the end of 2009, the Trust Fund stood at $2.5 trillion. The $2.5 trillion amount owed by the federal government to the Social Security Trust Fund is also a component of the
U.S. National Debt
The national debt of the United States is the total national debt owed by the federal government of the United States to Treasury security holders. The national debt at any point in time is the face value of the then-outstanding Treasury secu ...
, which stood at $15.7 trillion as of May 2012. By 2017, the government had borrowed nearly $2.8 trillion against the Social Security Trust Fund.
Projections were made by the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (OASDI) in their 71st annual report dated May 13, 2011. Expenses exceeded tax receipts in 2010. The Trust Fund is projected to continue to grow for several years thereafter because of interest income from loans made to the
US Treasury
The Department of the Treasury (USDT) is the national treasury and finance department of the federal government of the United States, where it serves as an executive department. The department oversees the Bureau of Engraving and Printing and ...
.
However, the funds from loans made have been spent along with other revenues in the general funds in satisfying annual budgets. At some point, however, absent any change in the law, the Social Security Administration will finance payment of benefits through the net redemption of the assets in the Trust Fund. Because those assets consist solely of U.S. government securities, their redemption will represent a call on the federal government's general fund, which for decades has been borrowing the Trust Fund's surplus and applying it to its expenses to partially satisfy budget deficits. To finance such a projected call on the general fund, some combination of increasing taxes, cutting other government spending or programs, selling government assets, or borrowing would be required.
The balances in the Trust Fund are projected to be depleted either by 2036 (OASDI Trustees' 2011 projection), or by 2038 (Congressional Budget Office's extended-baseline scenario) assuming proper and continuous repayment of the outstanding treasury notes. At that point, under current law, the system's benefits would have to be paid from the FICA tax alone. Revenues from FICA are projected at that point to be continue to cover about 77% of projected Social Security benefits if no change is made to the current tax and benefit schedules.
Payroll tax rates were cut during 2011 and 2012 as a stimulus measure; these cuts expired at the end of 2012. The Social Security Trustees estimated the amounts at $222 billion total; $108 billion in 2011 and $114 billion in 2012. Transfers of other government funds made the program "whole" as if these tax cuts had not occurred.
Effect of unemployment on program funding
Increasing unemployment due to the
subprime mortgage crisis
The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. It was triggered by a large decline in US home prices after the col ...
of 2008–2010 has significantly reduced the amount of payroll tax income that funds Social Security. Further, the crisis also caused more to apply for both retirement and disability benefits than expected. During 2009, payroll taxes and taxation of benefits resulted in cash revenues of $689.2 billion, while payments totaled $685.8 billion, resulting in a cash surplus (excluding interest) of $3.4 billion. Interest of $118.3 billion meant that the Social Security Trust Fund overall increased by $121.7 billion (i.e., the cash surplus plus interest). The 2009 cash surplus of $3.4 billion was a significant reduction from the $63.9 billion cash surplus of 2008.
Effect of income inequality on program funding
Rising
income inequality
There are wide varieties of economic inequality, most notably income inequality measured using the distribution of income (the amount of money people are paid) and wealth inequality measured using the distribution of wealth (the amount of we ...
also affects the funding of the Social Security program. The
Center for Economic and Policy Research
The Center for Economic and Policy Research (CEPR) is a progressive American think tank that specializes in economic policy. Based in Washington, D.C. CEPR was co-founded by economists Dean Baker and Mark Weisbrot in 1999.
Considered a lef ...
estimated in February 2013 that upward redistribution of income is responsible for about 43% of the projected
Social Security
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...
shortfall over the next 75 years. This is because income over the payroll tax cap ($127,200 in 2017) is not taxed; if individuals generate higher income above the taxable income limit, that lack of additional taxation results in lower funding than possible if there were no income limit.
The Social Security Administration explained in 2011 that historically, an average of roughly 83% of covered earnings have been subject to the payroll tax. In 1983, this figure reached 90%, but it has declined since then. As of 2010, about 86% of covered earnings fall under the taxable maximum.
Size of funding challenge
![CBO_2014_LTBO_Spending_Under_Ext_Baseline](https://upload.wikimedia.org/wikipedia/commons/4/4f/CBO_2014_LTBO_Spending_Under_Ext_Baseline.png)
The
CBO projected in 2010 that an increase in payroll taxes ranging from 1.6%–2.1% of the payroll tax base, equivalent to 0.6%–0.8% of GDP, would be necessary to put the Social Security program in fiscal balance for the next 75 years. In other words, raising the payroll tax rate to about 14.4% during 2009 (from the current 12.4%) or cutting benefits by 13.3% would address the program's budgetary concerns indefinitely; these amounts increase to around 16% and 24% if no changes are made until 2037. The value of unfunded obligations under Social Security during FY 2009 was approximately $5.4 trillion. In other words, this amount would have to be set aside today such that the principal and interest would cover the shortfall over the next 75 years. Projections of Social Security's solvency are sensitive to assumptions about rates of economic growth and demographic changes.
The
Center on Budget and Policy Priorities
The Center on Budget and Policy Priorities (CBPP) is a progressive American think tank that analyzes the impact of federal and state government budget policies. A 501(c)(3) nonprofit organization, the Center's stated mission is to "conduct resear ...
wrote in 2010: "The 75-year Social Security shortfall is about the same size as the cost, over that period, of extending the 2001 and 2003 tax cuts for the richest 2 percent of Americans (those with incomes above $250,000 a year). Members of Congress cannot simultaneously claim that the tax cuts for people at the top are affordable while the Social Security shortfall constitutes a dire fiscal threat."
Effect on the budget deficit
Because Social Security tax receipts and interest exceed payments, the program also reduces the size of the annual federal budget
deficit commonly reported in the media. For example, CBO reported that for fiscal year 2012, the "On-budget Deficit" was $1,151.3 billion. Social Security and the Post Office are considered "Off-Budget". Social Security had an estimated surplus of $62.4 billion by CBO accounting (different from the $54 billion reported by the Trustees) and the Post Office had a deficit of $0.5, resulting in a "Total Budget Deficit" of $1,089.4 billion. This latter figure is the one commonly reported in the media.
Framing the debate
Ideological arguments
Ideology plays a major part of framing the Social Security debate. Key points of philosophical debate include, among others:
[See the further reading: ]
* degree of ownership and choice among investment alternatives in determining one's own financial future;
* the right and extent of government taxation and wealth redistribution;
* trade-offs between social insurance and wealth creation;
* whether the program represents (or is perceived as) a charitable safety net (entitlement) or earned benefits; and
*
intergenerational equity
Intergenerational equity in economic, psychological, and sociological contexts, is the idea of fairness or justice between generations. The concept can be applied to fairness in dynamics between children, youth, adults, and seniors. It can al ...
, meaning the rights of those living today to impose burdens on future generations.
Retirees and others who receive Social Security benefits have become an important bloc of voters in the United States. Indeed, Social Security has been called "the
third rail
A third rail, also known as a live rail, electric rail or conductor rail, is a method of providing electric power to a railway locomotive or train, through a semi-continuous rigid conductor placed alongside or between the rails of a railway ...
of American politics" — meaning that any politician sparking fears about cuts in benefits by touching the program endangers his or her political career. The ''
New York Times
''The New York Times'' (''the Times'', ''NYT'', or the Gray Lady) is a daily newspaper based in New York City with a worldwide readership reported in 2020 to comprise a declining 840,000 paid print subscribers, and a growing 6 million paid ...
'' wrote in January 2009 that Social Security and
Medicare "have proved almost sacrosanct in political terms, even as they threaten to grow so large as to be unsustainable in the long run".
Conservative ideological arguments
Conservatives and libertarians argue that Social Security reduces individual ownership by redistributing wealth from workers to retirees and bypassing the free market. Social Security taxes paid into the system cannot be passed to future generations, as private accounts can, thereby preventing the accumulation of wealth to some degree. According to the
Cato Institute
The Cato Institute is an American libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Ed Crane, Murray Rothbard, and Charles Koch, chairman of the board and chief executive officer of Koch Industries.Koch Ind ...
, a libertarian think tank, private accounts have a much higher rate of return than Social Security accounts. Conservatives tend to argue for a fundamental change in the structure of the program. Conservatives also argue that the U.S. Constitution does not permit the Congress to set up a savings plan for retirees (leaving this authority to the states), although the U.S. Supreme Court ruled in
Helvering v. Davis that Congress had this authority.
Liberal ideological arguments
Liberals argue that government has the obligation to provide social insurance, through mandatory participation and broad program coverage. During 2004, Social Security constituted more than half of the income of nearly two-thirds of retired Americans. For one in six, it is their only income.Liberals tend to defend the current program, preferring tax increases and payment modifications.
Economist
Lawrence Summers
Lawrence Henry Summers (born November 30, 1954) is an American economist who served as the 71st United States secretary of the treasury from 1999 to 2001 and as director of the National Economic Council from 2009 to 2010. He also served as pres ...
wrote in August 2016 that raising the Social Security payouts could reduce the savings rate, as the economy faced a post-crisis savings surplus, which was driving down interest rates: "...
current interest rates an increase in pay as you go social security could provide households with higher safe returns than private investments. More generous Social Security would likely reduce the saving rate, thereby raising the neutral interest rate
he rate required to achieve full employmentwith no change in budget deficits."
Pro-privatization arguments
The conservative position is often pro-privatization. There are countries other than the U.S. that have set up individual accounts for individual workers, which allow workers leeway in decisions about the securities in which their accounts are invested, which pay workers after retirement through
annuities
In investment, an annuity is a series of payments made at equal intervals.Kellison, Stephen G. (1970). ''The Theory of Interest''. Homewood, Illinois: Richard D. Irwin, Inc. p. 45 Examples of annuities are regular deposits to a savings account, m ...
funded by the individual accounts, and which allow the funds to be inherited by the workers' heirs. Such systems are referred to as 'privatized.' Currently, the United Kingdom, Sweden, and
Chile
Chile, officially the Republic of Chile, is a country in the western part of South America. It is the southernmost country in the world, and the closest to Antarctica, occupying a long and narrow strip of land between the Andes to the eas ...
are the most frequently cited examples of privatized systems. The experiences of these countries are being debated as part of the current Social Security controversy.
In the United States in the late 1990s, privatization found advocates who complained that U.S. workers, paying compulsory payroll taxes into Social Security, were missing out on the high rates of return of the U.S.
stock market
A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, ...
(the
Dow averaged 5.3% compounded annually for the 20th century). They likened their proposed "Private Retirement Accounts" (PRAs) to the popular
Individual Retirement Account
An individual retirement account (IRA) in the United States is a form of pension provided by many financial institutions that provides tax advantages for retirement savings. It is a trust that holds investment assets purchased with a taxpayer's e ...
s (IRAs) and
401(k)
In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodical employee contributions come directly out of the ...
savings plans. But in the meantime, several conservative and libertarian organizations that considered it a crucial issue, such as the
Heritage Foundation
The Heritage Foundation (abbreviated to Heritage) is an American conservative think tank based in Washington, D.C. that is primarily geared toward public policy. The foundation took a leading role in the conservative movement during the preside ...
and
Cato Institute
The Cato Institute is an American libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Ed Crane, Murray Rothbard, and Charles Koch, chairman of the board and chief executive officer of Koch Industries.Koch Ind ...
, continued to lobby for some form of Social Security privatization.
Anti-privatization arguments
The liberal position is typically anti-privatization. Those who have taken an anti-privatization position argue several points (among others), including:
* Privatization does not address Social Security's long-term funding challenges. The program is "pay as you go", meaning current payroll taxes pay for current retirees. Diverting payroll taxes (or other sources of government funds) to fund private accounts would drive enormous deficits and borrowing ("transition costs").
* Privatization converts the program from a "defined benefits" plan to a "defined contribution" plan, subjecting the ultimate payouts to stock or bond market fluctuations;
* Social Security payouts are indexed to wages, which historically have exceeded inflation. As such, Social Security payments are protected from inflation, while private accounts might not be;
* Privatization would represent a windfall for Wall Street financial institutions, who would obtain significant fees for managing private accounts.
* Privatization in the midst of the greatest economic downturn since the
Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
would have caused households to have lost even more of their assets, had their investments been invested in the U.S. stock market.
Chronology of prior reform attempts and proposals
* A roots of partial reform attempts or proposal of social security may be able to go trace back the 1930s when institutions are established.
* October 1997 – The Democratic president,
Bill Clinton
William Jefferson Clinton (né Blythe III; born August 19, 1946) is an American politician who served as the 42nd president of the United States from 1993 to 2001. He previously served as governor of Arkansas from 1979 to 1981 and again ...
, and the Republican Speaker of the House,
Newt Gingrich
Newton Leroy Gingrich (; né McPherson; born June 17, 1943) is an American politician and author who served as the 50th speaker of the United States House of Representatives from 1995 to 1999. A member of the Republican Party, he was the U. ...
, reached a secret agreement to reform Social Security. The agreement required both the President and the Speaker to forge a centrist coalition by persuading moderate members of Congress from their respective parties to compromise.
* January 1998 – Progress on the reform agreement reached on October 28, 1997, between Bill Clinton and Newt Gingrich was derailed by the
Lewinsky scandal approximately a week before Clinton was to announce the initiative in his State of the Union address.
* March 1999 - Republican Senators
Spencer Abraham
Edward Spencer Abraham (born June 12, 1952) is an American attorney, author, and politician who served as the tenth United States Secretary of Energy from 2001 to 2005, under President George W. Bush. A member of the Republican Party, Abraham pr ...
and
Pete Domenici
Pietro Vichi "Pete" Domenici (May 7, 1932 – September 13, 2017) was an American attorney and politician who served as a United States Senator from New Mexico from 1973 to 2009. A member of the Republican Party, he served six terms in the S ...
circulate the first of a series of "lock box" proposals. These proposals would amend each house's rules, declaring it out of order to consider any bill that would contribute to a Social Security deficit unless a majority or supermajority votes to suspend the rules. All of these proposals failed, but Vice President
Al Gore
Albert Arnold Gore Jr. (born March 31, 1948) is an American politician, businessman, and environmentalist who served as the 45th vice president of the United States from 1993 to 2001 under President Bill Clinton. Gore was the Democratic ...
would make the "lock box" concept a part of his presidential campaign program in 2000.
* February 2005 – Republican President
George W. Bush outlined a major initiative to reform Social Security which included partial privatization of the system, personal Social Security accounts, and options to permit Americans to divert a portion of their Social Security tax (
FICA
The Federal Insurance Contributions Act (FICA ) is a United States federal payroll (or employment) contribution directed towards both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for re ...
) into secured investments. In his
2005 State of the Union Address, Bush discussed the potential bankruptcy of the program. Democrats opposed the proposal.
Bush campaigned for the initiative in a 60-day national tour. However, public support for the proposal only declined. The House Republican leadership tabled Social Security reform for the remainder of the session. In the
2006 midterm elections, Democrats gained control of both houses, effectively killing the plan for the remainder of Bush's term in office.
* December 2011 – Democratic President Obama's
National Commission on Fiscal Responsibility and Reform
The National Commission on Fiscal Responsibility and Reform (often called Simpson–Bowles or Bowles–Simpson from the names of co-chairs Alan Simpson and Erskine Bowles; or NCFRR) was a bipartisan Presidential Commission on deficit reduction, ...
proposed the "Bowles-Simpson" plan for making the system solvent. It combined increases in the Social Security payroll tax and reductions in benefits, starting several years in the future. It would have reduced benefits for upper-income workers while raising them for those with lifetime earnings averaging less than $11,000 a year. Republicans rejected the tax increases and Democrats rejected benefit cuts. A powerful network of elderly and liberal organizations and union workers also fought any changes.
Alternate views
Advocates of major change in the system generally argue that drastic action is necessary because Social Security is facing a crisis. In his 2005 State of the Union speech, President Bush indicated that Social Security was facing "bankruptcy". In his 2006 State of the Union speech, he described entitlement reform (including Social Security) as a "national challenge" that, if not addressed timely, would "present future Congresses with impossible choices – staggering tax increases, immense deficits, or deep cuts in every category of spending".
A
liberal think tank
A think tank, or policy institute, is a research institute that performs research and advocacy concerning topics such as social policy, political strategy, economics, military, technology, and culture. Most think tanks are non-govern ...
, 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" and that Bush's statement should have no credibility.
In 2004
Nobel Laureate
The Nobel Prizes ( sv, Nobelpriset, no, Nobelprisen) are awarded annually by the Royal Swedish Academy of Sciences, the Swedish Academy, the Karolinska Institutet, and the Norwegian Nobel Committee to individuals and organizations who make out ...
economist
Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was th ...
, deriding what he called "the hype about a Social Security crisis", wrote:
President Ronald Reagan stated in October 1984: "Social Security has nothing to do with the deficit...Social Security is totally funded by the payroll tax levied on employer and employee. If you reduce the outgo of Social Security that money would not go into the general fund to reduce the deficit. It would go into the Social Security trust fund. So, Social Security has nothing to do with balancing a budget or erasing or lowering the deficit."
The claims of the probability of future difficulty with the current Social Security system are largely based on the annual analysis made of the system and its prospects and reported by the governors of the Social Security system. While such analysis can never be 100% accurate, it can at least be made using different probable future scenarios and be based on rational assumptions and reach rational conclusions, with the conclusions being no better (in terms of predicting the future) than the assumptions on which the predictions are based. With these predictions in hand, it is possible to make at least some prediction of what the future retirement security of Americans who will rely on Social Security might be. It is worth noting that James Roosevelt, former associate commissioner for Retirement Policy for the Social Security Administration, claims that the "crisis" is more a myth than a fact.
[
]
The Social Security public trustees including
Charles Blahous
Charles Paul "Chuck" Blahous III (; born 1963) is the J. Fish and Lillian F. Smith Chair and Senior Research Strategist at thMercatus Centerat George Mason University, as well as a visiting fellow at Stanford University's Hoover Institution, specia ...
warned in May 2013 that the "window for effective action" to take place was "rapidly closing", with less favorable options available to rectify the problems as time passes.
Proponents of the current system argue if and when the Trust Fund runs out, there will still be the choice of raising taxes or cutting benefits, or both.
[
] Advocates of the current system say that the projected deficits in Social Security are identical to the "prescription drug benefit" enacted in 2002. They say that demographic 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.
These Social Security proponents argue that the correct plan is to fix
Medicare, which is the largest underfunded entitlement, repeal the 2001–2004 tax cuts, and balance the budget. They believe a growth trendline will emerge from these steps, and the government can 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.
Studies of Social Security policy alternatives
Robert L. Clark, an economist at
North Carolina State University
North Carolina State University (NC State) is a public land-grant research university in Raleigh, North Carolina. Founded in 1887 and part of the University of North Carolina system, it is the largest university in the Carolinas. The universit ...
who specializes in
aging issues, formerly served as a chairman of a national panel on Social Security's financial status; he has said that future options for Social Security are clear: "You either raise taxes or you cut benefits. There are lots of ways to do both."
David Koitz, a 30-year veteran of the
Congressional Research Service
The Congressional Research Service (CRS) is a public policy research institute of the United States Congress. Operating within the Library of Congress, it works primarily and directly for members of Congress and their committees and staff on a c ...
, echoed these remarks in his 2001 book ''Seeking Middle Ground on Social Security Reform:'' "The real choices for resolving the system's problems...require current lawmakers to raise revenue or cut spending—to change the law now to explicitly raise future taxes or constrain future benefits." He discusses the 1983 Social Security amendments that followed the Greenspan Commission's recommendations. It was the commission's recommendations that provided political cover for both political parties to act. The changes approved by President Reagan in 1983 were phased in over time and included raising the retirement age from 65 to 67, taxation of benefits, cost of living adjustment (COLA) delays, and inclusion of new federal hires in the program. There was a key point during the debate when House members were forced to choose between raising the retirement age or raising future taxes; they chose the former. Senator
Daniel Patrick Moynihan
Daniel Patrick Moynihan (March 16, 1927 – March 26, 2003) was an American politician, diplomat and sociologist. A member of the Democratic Party, he represented New York in the United States Senate from 1977 until 2001 and served as an ...
indicated the compromises involved showed that lawmakers could still govern. Koitz cautions against the concept of a
free lunch
A free lunch is the providing of a meal at no cost, usually as a sales enticement to attract customers and increase revenues from other business. It was once a common tradition in saloons and taverns in many places in the United States, with th ...
; retirement security cannot be provided without benefit cuts or tax increases.
Economist
Alice M. Rivlin
Alice Mitchell Rivlin (born Georgianna Alice Mitchell; March 4, 1931 – May 14, 2019) was an American economist and budget official. She served as the 16th Vice Chair of the Federal Reserve from 1996 to 1999. Before her appointment at the F ...
summarized major reform proposals in January 2009: "Fixing Social Security is a relatively easy technical problem. It will take some combination of several much-discussed marginal changes: raising the retirement age gradually in the future (and then indexing it to longevity), raising the cap on the payroll tax, fixing the cost of living adjustment, and modifying the indexing of initial benefits so they grow more slowly for more affluent people. In view of the collapse of market values, no one is likely to argue seriously for diverting existing revenues to private accounts, so the opportunity to craft a compromise is much greater than it was a few years ago. Fixing Social Security would be a confidence building achievement for bi-partisan cooperation and would enhance our reputation for fiscal prudence."
Various institutions have analyzed different reform alternatives, including the CBO, ''
U.S. News & World Report'', the AARP, and the
Urban Institute
The Urban Institute is a Washington, D.C.–based think tank that carries out economic and social policy research to "open minds, shape decisions, and offer solutions". The institute receives funding from government contracts, foundations and pr ...
.
CBO studies
![CBO - Effect of Policy options on Social Security](https://upload.wikimedia.org/wikipedia/commons/a/a8/CBO_-_Effect_of_Policy_options_on_Social_Security.png)
The CBO reported in July 2010 the effects of a series of policy options on the "actuarial balance" shortfall, which over the 75 year horizon is approximately 0.6% of GDP. Social Security is facing a long-run shortfall of approximately 1% GDP per year or $155 billion/year in 2012 dollars. Key reform proposals include:
* Removing the cap on the payroll tax. Income over a threshold ($110,100 in 2012) is not subject to the payroll tax, nor are additional benefits paid to those with income above this level. Removing the cap would fund the entire 75-year shortfall.
* Raising the retirement age gradually. Raising the full-benefit retirement age to 70 would fund half the 75-year shortfall.
* Reducing cost of living adjustments (COLA), which are annual payout increases to keep pace with wages. Reducing each year's COLA by 0.5% versus the current formula would fund half the shortfall over 75 years.
* Reducing Initial Benefits for wealthier retirees, based on lifetime earnings.
* Raising the payroll tax rate. Raising the rate by one percentage point would cover half the shortfall for 75 years. Raising the rate by two percentage points gradually over 20 years would cover the entire shortfall.
One way to measure mandatory program risks is in terms of unfunded liabilities, the amount that would have to be set aside today such that principal and interest would cover program shortfalls (spending over tax revenue dedicated to the program). These are measured over a 75-year period and infinite horizon by the program's Trustees:
* The
present value
In economics and finance, present value (PV), also known as present discounted value, is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money has inte ...
of unfunded obligations under Social Security was approximately $8.6 trillion over a 75-year forecast period (2012-2086). The estimated annual shortfall averages 2.5% of the payroll tax base or 0.9% of
gross domestic product
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is of ...
(a measure of the size of the economy). Measured over the infinite horizon, these figures are $20.5 trillion, 3.9% and 1.3%, respectively.
CBO estimated in January 2012 that raising the full retirement age for Social Security from 67 to 70 would reduce outlays by about 13%. Raising the early retirement age from 62 to 64 has little impact, as those who wait longer to begin receiving benefits get a higher amount. Raising the retirement age increases the size of the workforce and the size of the economy by about 1%.
CBO provided estimates regarding various reform alternatives in a July 2014 letter to Senator
Orrin Hatch
Orrin Grant Hatch (March 22, 1934 – April 23, 2022) was an American attorney and politician who served as a United States senator from Utah from 1977 to 2019. Hatch's 42-year Senate tenure made him the longest-serving Republican U.S. senator ...
. For example, CBO wrote: "To bring the OASDI
ocial Securityprogram as a whole into actuarial balance through 2087 with the taxable maximum set according to current law
118,500 in 2015 the combined OASDI payroll tax rate could be permanently increased by about 3.5 percentage points...Under that option, the combined OASDI payroll tax rate would rise from 12.4 percent to 15.9 percent in 2015. Revenues credited to the Social Security trust funds in 2015 would increase by about 28 percent." This would raise taxes for a worker earning $50,000 by about $900 per year.
AARP study
The
AARP
AARP (formerly called the American Association of Retired Persons) is an interest group in the United States focusing on issues affecting those over the age of fifty. The organization said it had more than 38 million members in 2018. The magazin ...
publishes its views on Social Security reform options periodically. It summarized its views on a series of reform options during October 2012.
Urban Institute study
The Urban Institute
The Urban Institute based in Edinburgh, Scotland is a collaboration of researchers at Heriot-Watt University and the University of Edinburgh on urban issues. It was founded in 2016 under the leadership of professor Dr. Mark Stephens. The institut ...
estimated the effects of alternative solutions during May 2010, along with an estimated program deficit reduction:
* Reducing the cost of living adjustments (COLA) by one percentage point: 75%
* Increasing the full retirement age to 68: 30%
* Indexing the COLA to prices rather than wages, except for bottom one-third of income earners: 65%
* Raising the payroll tax cap (capped at $106,800 in 2010) to cover 90% instead of 84% of earnings: 35%
* Raising the payroll tax rate by one percentage point: 50%.
Fiscal Reform Commission
On February 18, 2010, President Obama issued an executive order mandating the creation of the bipartisan National Commission on Fiscal Responsibility and Reform,
which had the goal to "
sure lasting Social Security solvency, prevent the projected 22% cuts to come in 2037, reduce elderly poverty, and distribute the burden fairly". The co-chairmen of the
National Commission on Fiscal Responsibility and Reform
The National Commission on Fiscal Responsibility and Reform (often called Simpson–Bowles or Bowles–Simpson from the names of co-chairs Alan Simpson and Erskine Bowles; or NCFRR) was a bipartisan Presidential Commission on deficit reduction, ...
published their final report in December 2010. The co-chairmen estimated the effects of alternative solutions, along with an estimated program deficit reduction:
* Raising the payroll tax cap to cover 90% of earnings: 35%
* Indexing retirement age to life expectancy: 21%
* Adjusting the COLA formula to reflect chained CPI (e.g., reduce the COLA): 26%
In addition, the final report proposed the steps to ensure the sustainability of Social Security, such as:
* "
ndat
ngcoverage for all state and local workers newly hired after 2020" to "simplify retirement planning and benefit coordination for workers who spend part of their career working in state and local governments, and will ensure that all workers, regardless of employer, will retire with a secure and predictable benefit check";
* Educating future retirees about "the full implications of various retirement decisions, with an eye toward encouraging delayed retirement and enhanced levels of retirement savings"; and
* Enhancing dialogue regarding the importance of personal retirement savings and responsibility, including a focus reducing personal debt and increasing personal assets.
President Obama's proposals
As of September 14, 2008,
Barack Obama
Barack Hussein Obama II ( ; born August 4, 1961) is an American politician who served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, Obama was the first African-American president of the U ...
indicated preliminary views on Social Security reform. His website indicated that he "will work with members of Congress from both parties to strengthen Social Security and prevent privatization while protecting middle-class families from tax increases or benefit cuts. As part of a bipartisan plan that would be phased in over many years, he would ask families making over $250,000 to contribute a bit more to Social Security to keep it sound." He has opposed raising the retirement age, privatization, or cutting benefits.
Specific proposals by topic
Reduce cost of living adjustments
The current system sets the initial benefit level based on the retiree's past wages. The benefit level is based on the 35 highest years of earnings. This initial amount is then subject to an annual Cost of Living Adjustment or COLA. Recent COLA were 2.3% in 2007, 5.8% in 2008, and zero for 2009–2011.
The COLA is computed based on the "
Consumer Price Index
A consumer price index (CPI) is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.
Overview
A CPI is a statistica ...
for Urban Wage Earners and Clerical Workers" or CPI-W. According to the CBO: "Many analysts believe that the CPI-W overstates increases in the cost of living because it does not fully account for the fact that consumers generally adjust their spending patterns as some prices change relative to others". However, CBO also reported that: "CPI-E, an experimental version of the CPI that reflects the purchasing patterns of older people, has been 0.3 percentage points higher than the CPI-W over the past three decades". CBO estimates that reducing the COLA by 0.5% annually from its current computed amount would reduce the 75-year actuarial shortfall by 0.3% of GDP or about 50%. Reducing each year's COLA results in an annual compounding effect, with greater effect on those receiving benefits the longest.
There is disagreement about whether a reduction in the COLA constitutes a "benefit cut"; the
Center for Budget and Policy Priorities considers any reduction in future promised benefits to be a "cut". However, others dispute this assertion because under any indexing strategy the actual or nominal amount of Social Security checks would never decrease but could increase at a lesser rate.
Raise the eligibility or retirement age
CBO estimated in 2010 that raising the retirement age to 70 gradually would eliminate half the 75-year funding shortfall.
However, raising the retirement age disproportionally impacts lower-income workers and those who perform manual labor. The Social Security full payout retirement age in 2015 was 66 years of age; it is gradually rising to 67. However, most Americans begin taking reduced early benefits at age 62. While Americans are living longer, much of the increase in life expectancy is among those with higher incomes. The Social Security Administration estimated that retirees who made above-average incomes in their working years live six years longer than they did in the 1970s. However, retirees in the bottom half of the income distribution live only 1.3 years longer. In addition, many lower-income workers have jobs that require standing or manual labor, which becomes increasingly difficult for older workers.
Progressive indexing
Progressive indexing would lower the COLA or benefit levels for higher wage groups, with no impact or lesser impact on lower-wage groups. The Congressional Research Service reported that:
Progressive indexing," would index initial benefits for low earners to wage growth (as under current law), index initial benefits for high earners to price growth (resulting in lower projected benefits compared to current-law promised benefits), and index benefits for middle earners to a combination of wage growth and price growth.
President Bush endorsed a version of this approach suggested by
financier
An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...
Robert Pozen
Robert Charles Pozen known as "Bob" (born 1946) is an American financial executive with a strong interest in public policy. Pozen currently teaches executives about how to be more productive and serves as an executive coach and mentor, www.bobpozen ...
, which would mix price and wage indexing in setting the initial benefit level. The "
progressive" feature is that the less generous price indexing would be used in greater proportion for retirees with higher incomes. The ''
San Francisco Chronicle
The ''San Francisco Chronicle'' is a newspaper serving primarily the San Francisco Bay Area of Northern California. It was founded in 1865 as ''The Daily Dramatic Chronicle'' by teenage brothers Charles de Young and M. H. de Young, Michael H. de ...
'' gave this explanation:
Under Pozen's plan, which is likely to be significantly altered even if the concept remains in legislation, all workers who earn more than about $25,000 a year would receive some benefit cuts. For example, those who retire in 50 years while earning about $36,500 a year would see their benefits reduced by 20 percent from the benefits promised under the current plan. Those who earn $90,000 — the maximum income in 2005 for payroll taxes — and retire in 2055 would see their benefits cut 37 percent.
As under the current system, all retirees would have their initial benefit amount adjusted periodically for price
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
occurring after their retirement. Thus, the
purchasing power
Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would ...
of the monthly benefit level would be frozen, rather than increasing by the difference between the (typically higher) CPI-W and (typically lower) CPI-U, a broader measure of inflation.
Adjustments to the payroll tax limit
During 2015, payroll taxes were levied on the first $118,500 of income; earnings above that amount were not taxed. Approximately 6% of workers earned over this amount in 2011.
Because of this limit, people with higher incomes pay a lower percentage of tax than people with lower incomes; the payroll tax is therefore a
regressive tax
A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high t ...
.
CBO estimated in 2010 that removing the cap on the payroll tax (i.e., making all income subject to the flat payroll tax rate) would fully fund the program for 75 years.
Removing the cap on income over $250,000 only (i.e., a "donut" in the tax code) would address about 75% of the program shortfall over 75 years.
2013 Harkin bill
In March 2013, Senator
Tom Harkin
Thomas Richard Harkin (born November 19, 1939) is an American lawyer, author, and politician who served as a United States senator from Iowa from 1985 to 2015. A member of the Democratic Party, he previously was the U.S. representative for Iowa' ...
introduced S. 567: Strengthening Social Security Act of 2013. Supporters of the bill state that "By making millionaires and billionaires pay the same rate of Social Security taxes as the rest of us, and by changing the method by which Social Security benefits are calculated, Sen. Harkin's bill would expand Social Security benefits by an average of $800 per recipient per year while also keeping the program solvent" for "generations". Supporters include the
Alliance for Retired Americans
The Alliance for Retired Americans (ARA) is a 501(c)(4) non-profit organization and nonpartisan organization of retired trade union members affiliated with the AFL-CIO, which founded it in 2001. The group's membership also includes non-union, c ...
The letter of support by the Alliance, a nonprofit, nonpartisan organization of 4 million, states that S. 567 "recognizes the true importance of this great American program and proposes measures that would both enhance benefits for current beneficiaries and strengthen the long-term solvency of Social Security for all Americans".
Diamond-Orszag Plan
Peter A. Diamond
Peter Arthur Diamond (born , 1940) is an American economist known for his analysis of U.S. Social Security policy and his work as an advisor to the Advisory Council on Social Security in the late 1980s and 1990s. He was awarded the Nobel Memoria ...
and
Peter R. Orszag
Peter Richard Orszag (born December 16, 1968) is the CEO of Financial Advisory at Lazard. Before June 2019, he was the firm's Head of North American M&A and Global Co-Head of Healthcare.
Orszag previously served as a Vice Chairman of Corporate ...
proposed in their 2005 book ''Saving Social Security: A Balanced Approach'' that Social Security be stabilized by various tax and spend adjustments and gradually ending the process by which the general fund has been borrowing from payroll taxes. This requires increased revenues devoted to Social Security. Their plan, as with several 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 from the current 12.4%.
Public opinion polls
According to a June 2014 Pew Research Center poll:
*67% supported no benefit reductions, with 27% supporting more benefits and 37% supporting a similar level of benefits.
*31% supported benefit reductions, with 24% supporting fewer benefits while 6% wanted to phase out the program.
However, the poll also indicated Americans are skeptical about the future of the program: "Among the overall public, just 14% expect that Social Security will have sufficient resources to provide the current level of benefits; 39% say there will be enough money to provide reduced benefits and 43% think that, when they retire, the program will be unable to provide any benefits."
According to a December 2012 Pew Research Center poll:
*69% support raising the tax rate on income over $250,000.
*51% support reducing Social Security payments to high-income seniors.
*42% support gradually raising the retirement age.
A January 2015 Pew Research Center poll indicated that "Making Social Security system sound" was the 5th highest priority of out 23 topics.
According to a July 2015 Gallup poll, many Americans doubt they will get Social Security benefits, although the level of doubt is similar to readings going back to 1989. Over 50% of Americans "say they doubt the system will be able to pay them a benefit when they retire." The percentage has fluctuated since its initial reading at 47% in 1989 and peaked as high as 60% in 2010. The percentage is 30% for those aged 50–64, but is above 60% for those 18–49. This view runs contrary to the Social Security Trustees Reports, which indicate that since payroll taxes are dedicated to the program by law, even without reform Social Security will pay about 75% of promised benefits after the Trust Fund is exhausted in the early 2030s.
Conceptual arguments regarding privatization
Cost of transition and long-term funding concerns
Critics argue that privatizing Social Security does nothing to address the long-term funding concerns. Diverting funds to private accounts would reduce available funds to pay current retirees, requiring significant borrowing. An analysis by the Center on Budget and Policy Priorities estimates that President Bush's 2005 privatization proposal would add $1 trillion in new federal debt in its first decade of implementation and $3.5 trillion in the decade thereafter. The 2004 Economic Report of the President found that the federal budget deficit would be more than 1 percent of
gross domestic product
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is of ...
(GDP) higher every year for roughly two decades; U.S. GDP in 2008 was $14 trillion. The debt burden for every man, woman, and child would be $32,000 higher after 32 years because of privatization.
Privatization proponents counter that the savings to the government would come through a mechanism called a "clawback", where profits from private account investment would be taxed, or a benefit reduction meaning that individuals whose accounts underperformed the market would receive less than current benefit schedules, although, even in this instance, the heirs of those who die early could receive increased benefits even if the accounts underperformed historical returns.
Opponents of privatization also point out that, even conceding for sake of argument that what they call highly optimistic numbers are true, they fail to count what the transition will cost the country as a whole. Gary Thayer, chief economist for
A. G. Edwards
A.G. Edwards, Inc. was an American financial services holding company; its principal wholly owned subsidiary was A.G. Edwards & Sons, Inc., which operated as a full-service securities broker-dealer in the United States and Europe. The firm was ...
, has been cited in the
mainstream media
In journalism, mainstream media (MSM) is a term and abbreviation used to refer collectively to the various large mass news media that influence many people and both reflect and shape prevailing currents of thought.Chomsky, Noam, ''"What makes mai ...
saying that the cost of privatizing—estimated by some at $1 trillion to $2 trillion—would worsen the federal budget deficit in the short term, and "That's not something I think the credit markets would appreciate".
If, as in some plans, the interest expenditure on this debt is recaptured from the private accounts before any gains are available to the workers, then the net benefit could be small or nonexistent. And this is really a key to understanding the debate, because if, on the other hand, a system which mandated investment of all assets in U.S. Treasuries resulted in a positive net recapturing, this would illustrate that the captive nature of the system results in benefits that are lower than if it merely allowed investment in U.S. Treasuries (purported to be the safest investment on Earth).
Current Social Security system advocates claim 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 the United Kingdom and Chile.
Rate of return and individual initiative
Even some of those who oppose privatization agree that if current future promises to the current young generation are kept in the future, they will experience a much lower rate of return than past retirees have.
Under privatization, each worker's benefit would be the combination of a minimum guaranteed benefit and the return on the private account. The proponents' argument is that projected returns (higher than those individuals currently receive from Social Security) and ownership of the private accounts would allow lower spending on the guaranteed benefit, but possibly without any net loss of income to beneficiaries.
[
]
Both wholesale and partial privatization pose questions such as: 1) How much added risk will workers bear compared to the risks they face under current system? 2) What are the potential rewards? and 3) What happens at retirement to workers whose privatized risks turn out badly? For workers, privatization would mean smaller Social Security checks, in addition to increased compensation from returns on investments, according to historical precedent.
Debate has ensued over the advisability of subjecting workers' retirement money to market risks.
A technical economic argument for privatization is that, without it, the payroll taxes that support Social Security constitute a tax wedge that reduces the supply of labor, like other tax financed government welfare programs. Liberal economists like
Peter Orszag
Peter Richard Orszag (born December 16, 1968) is the CEO of Financial Advisory at Lazard. Before June 2019, he was the firm's Head of North American M&A and Global Co-Head of Healthcare.
Orszag previously served as a Vice Chairman of Corporate ...
and
Joseph Stiglitz
Joseph Eugene Stiglitz (; born February 9, 1943) is an American New Keynesian economist, a public policy analyst, and a full professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences (2001) and the Joh ...
have argued that Social Security is already perceived as enough of a forced savings program to preclude a reduction in the labor supply. Richard Disney has agreed with this reply, noting, "To the extent that pension contributions are perceived as giving individuals rights to future pensions, the behavioral reaction of program participants to contributions will differ from their reactions to other taxes. In fact, they might regard pension contributions as providing an opportunity for retirement saving, in which case contributions should not be deducted
y economistsfrom household's earnings and should not be included in the tax wedge''."''
Privatization advocates nonetheless do not believe that social security taxes will be sufficiently regarded as pension contributions as long as they remain legally structured as taxes (as opposed to being contributions to their own private pensions).
To the extent that pension contributions are perceived as giving individuals rights to future pensions, the behavioral reaction of program participants to contributions will differ from their reactions to other taxes. In fact, they might regard pension contributions as providing an opportunity for retirement saving, in which case contributions should not be deducted from household's earnings and should not be included in the tax wedge.
Supporters of the current system maintain that its combination of low risks and low management costs, along with its social insurance provisions, work well for what the system was designed to provide: a baseline income for citizens derived from
savings
Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an I ...
. From their perspective, the major deficiency of any privatization scheme is risk. Like any private investments, PRAs could fail to produce any return or could produce a lower return than proponents of privatization assert,
and could even suffer a reduction in principal.
Advocates of privatization have long criticized Social Security for lower returns than the returns available from other investments, and cite numbers based on historical performance. The
Heritage Foundation
The Heritage Foundation (abbreviated to Heritage) is an American conservative think tank based in Washington, D.C. that is primarily geared toward public policy. The foundation took a leading role in the conservative movement during the preside ...
, a
conservative
Conservatism is a cultural, social, and political philosophy that seeks to promote and to preserve traditional institutions, practices, and values. The central tenets of conservatism may vary in relation to the culture and civilization i ...
think tank, calculates that a 40-year-old male with an income just under $60,000, will contribute $284,360 in payroll taxes to the Social Security Trust Fund over his working life, and can expect to receive $2,208 per month in return under the current program. They claim that the same 40-year-old male, investing the same $284,360 equally weighted into treasuries and high-grade corporate bonds over his working life, would own a PRA at retirement worth $904,982 which would pay an annuity of up to $7,372 per month (assuming that the dollar volume of such investments would not dilute yields so that they are lower than averages from a period in which no such dilution occurred.) Furthermore, they argue that the "efficiency" of the system should be measured not by costs as a percent of assets, but by returns after expenses (e.g. a 6% return reduced by 2% expenses would be preferable to a 3% return reduced by 1% expenses).
Other advocates state that because privatization would increase the wealth of Social Security users, it would contribute to consumer spending, which in turn would cause economic growth.
Supporters of the current system argue that the long-term trend of U.S. securities markets cannot safely be extrapolated forward, because stock prices relative to earnings are already at very high levels by historical standards. They add that an exclusive focus on long-term trends would ignore the increased risks they think privatization would cause. The general upward trend has been punctuated by severe downturns. Critics of privatization point out that workers attempting to retire during any future such downturns, even if they prove to be temporary, will be placed at a severe disadvantage.
Proponents argue that a privatized system would open up new funds for investment in the economy, and would produce real growth. They claim that the treasuries held in the current Trust Fund are covering consumption rather than investments, and that their value rests solely upon the continued ability of the U.S. government to impose taxes.
Michael Kinsley
Michael E. Kinsley (born March 9, 1951) is an American political journalist and commentator. Primarily active in print media as both a writer and editor, he also became known to television audiences as a co-host on ''Crossfire''.
Early life and e ...
has said that there would be no net new funds for investment, because any money diverted into private accounts would produce a dollar-for-dollar increase in the federal government's borrowing from other sources to cover its general deficit.
Meanwhile, some investment-minded observers among those who do not support privatization, point out potential pitfalls to the Trust Fund's undiversified portfolio, containing only treasuries. Many of these support the government itself investing the Trust Fund into other securities, to help boost the system's overall soundness through
diversification
Diversification may refer to:
Biology and agriculture
* Genetic divergence, emergence of subpopulations that have accumulated independent genetic changes
* Agricultural diversification involves the re-allocation of some of a farm's resources to n ...
, in a plan similar to
CalPERS
The California Public Employees' Retirement System (CalPERS) is an agency in the California executive branch that "manages pension and health benefits for more than 1.5 million California public employees, retirees, and their families".CalPERSFac ...
in the state of
California
California is a U.S. state, state in the Western United States, located along the West Coast of the United States, Pacific Coast. With nearly 39.2million residents across a total area of approximately , it is the List of states and territori ...
. Among the proponents of this idea were some members of President
Bill Clinton
William Jefferson Clinton (né Blythe III; born August 19, 1946) is an American politician who served as the 42nd president of the United States from 1993 to 2001. He previously served as governor of Arkansas from 1979 to 1981 and again ...
's 1996 Social Security commission that studied the issue; the majority of the group supported partial privatization, and other members put forth the idea that Social Security funds should themselves be invested in the private markets to gain a higher rate of return.
Another criticism of privatization is that while it might theoretically relieve the government of financial responsibility, in practice for every winner from moving risk from the collective to the individual there will be a loser, and the government will be held politically responsible for preventing those losers from slipping into
poverty
Poverty is the state of having few material possessions or little income. Poverty can have diverse social, economic, and political causes and effects. When evaluating poverty in ...
. Proponents of the current system suspect that for the individuals whose risks turn out badly, these same individuals will support political action to raise state benefits, such that the risks such individuals may be willing to take under a privatized system are not without
moral hazard
In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk ...
.
Role of government
There are also substantive issues that do not involve
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
, but rather the role of government. Conservative
Nobel Prize
The Nobel Prizes ( ; sv, Nobelpriset ; no, Nobelprisen ) are five separate prizes that, according to Alfred Nobel's will of 1895, are awarded to "those who, during the preceding year, have conferred the greatest benefit to humankind." Alfr ...
-winning
economist
An economist is a professional and practitioner in the social sciences, social science discipline of economics.
The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this ...
Gary S. Becker
Gary Stanley Becker (; December 2, 1930 – May 3, 2014) was an American economist who received the 1992 Nobel Memorial Prize in Economic Sciences. He was a professor of economics and sociology at the University of Chicago, and was a leader of ...
, currently a graduate professor at the
University of Chicago
The University of Chicago (UChicago, Chicago, U of C, or UChi) is a private research university in Chicago, Illinois. Its main campus is located in Chicago's Hyde Park neighborhood. The University of Chicago is consistently ranked among the b ...
, wrote in a February 15, 2005 article that "
rivatizationreduce
the role of government in determining retirement ages and incomes, and improve
government accounting of revenues and spending obligations".
He compares the privatization of Social Security to the privatization of the
steel
Steel is an alloy made up of iron with added carbon to improve its strength and fracture resistance compared to other forms of iron. Many other elements may be present or added. Stainless steels that are corrosion- and oxidation-resistant ty ...
industry, citing similar "excellent reasons".
Management costs of private funds
Opponents of privatization also decry the increased management costs that any privatized system will incur. Dishonest schemes can be sold to naive buyers in which pension values are bled through fees and commissions such as happened in the UK in 1988–1993.
[url=http://www.pensions-institute.org/workingpapers/wp0004.pdf]
Since the U.S. system is passively managed—with no specific funds being tied to specific investments within individual accounts, and with the system's surpluses being automatically invested only in treasuries—its management costs are very low.
Advocates of privatization at the
Cato Institute
The Cato Institute is an American libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Ed Crane, Murray Rothbard, and Charles Koch, chairman of the board and chief executive officer of Koch Industries.Koch Ind ...
, a
libertarian
Libertarianism (from french: libertaire, "libertarian"; from la, libertas, "freedom") is a political philosophy that upholds liberty as a core value. Libertarians seek to maximize autonomy and political freedom, and minimize the state's e ...
think tank, counter that, "Based on existing private pension plans, it appears reasonable to assume that the costs of administering a well-run system of PRAs might be anywhere from a low of roughly 15 basis points (0.15%) to a high of roughly 50 basis points (0.5%)."
They also point to the low costs of
index fund
An index fund (also index tracker) is a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that the fund can a specified basket of underlying investments.Reasonable Investor(s), Boston University Law Review, avail ...
s (funds whose value rises or falls according to a particular financial index), including an
S&P 500
The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of D ...
index fund whose management fees run between 8 basis point (0.08%) and 10 basis points (0.10%).
Potential windfall for Wall Street
Opponents also claim that privatization will bring a windfall for
Wall Street
Wall Street is an eight-block-long street in the Financial District of Lower Manhattan in New York City. It runs between Broadway in the west to South Street and the East River in the east. The term "Wall Street" has become a metonym for t ...
brokerages and
mutual fund
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...
companies, who will rake in billions of dollars in management fees.
Austan Goolsbee
Austan Dean Goolsbee (born August 18, 1969) is an American economist and writer. He is the Robert P. Gwinn Professor of Economics at the University of Chicago's Booth School of Business. at the
University of Chicago
The University of Chicago (UChicago, Chicago, U of C, or UChi) is a private research university in Chicago, Illinois. Its main campus is located in Chicago's Hyde Park neighborhood. The University of Chicago is consistently ranked among the b ...
has written a study, "The Fees of Private Accounts and the Impact of Social Security Privatization on Financial Managers", which calculates that, "Under Plan II of the President's Commission to Strengthen Social Security (CSSS), the net present value (NPV) of such payments would be $940 billion", and, "amounts to about one-quarter (25%) of the NPV of the revenue of the entire financial sector for the next 75 years", and concludes that, "The fees would be the largest windfall gain in American financial history".
Other analysts argue that dangers of a Wall Street windfall of such magnitude are being vastly overstated. Rob Mills, vice-president of the brokerage industry trade group
Securities Industry Association
The Securities Industry Association (SIA) was an association of firms and people who handle securities (in the financial sense) (stocks, bonds and their derivatives). In 2006, it merged with the Bond Market Association to form the Securities ...
, calculated in a report published in December 2004 that the proposed private accounts might generate $39 billion in fees, in NPV terms, over the next 75 years. This amount would represent only 1.2% of the sector's projected NPV revenues of $3.3 trillion over that timeframe. He concludes that privatization is "hardly likely to be a bonanza for Wall Street".
Other privatization proposals
A range of other proposals have been suggested for partial privatization, such as
the 7.65% Solution. One, suggested by a number of
Republican
Republican can refer to:
Political ideology
* An advocate of a republic, a type of government that is not a monarchy or dictatorship, and is usually associated with the rule of law.
** Republicanism, the ideology in support of republics or agains ...
candidates during the 2000 elections, would set aside an initially small but increasing percentage of each worker's payroll tax into a fund, which the worker would be allowed to invest in securities. Another eliminated the Social Security payroll tax completely for workers born after a certain date, and allowed workers of different ages different periods of time during which they could opt to not pay the payroll tax, in exchange for a proportional delay in their receipt of payouts.
Most state pension plans invest a portion of employer and employee contributions in a mixture of stocks, bonds, real estate, etc., which they or professional fund managers invest on behalf of the employees, without creating individual investment accounts.
George W. Bush's privatization proposal
President
George W. Bush discussed the "partial privatization" of Social Security since the beginning of his presidency in 2001. But only after winning
re-election in 2004 did he begin to invest his "
political capital
Political capital is the term used for an individual's ability to influence political decisions. This capital is built from what the opposition thinks of the politician, so radical politicians will lose capital. Political capital can be understoo ...
" in pursuing changes in earnest.
In May 2001, he announced establishment of a 16-member
bipartisan
Bipartisanship, sometimes referred to as nonpartisanship, is a political situation, usually in the context of a two-party system (especially those of the United States and some other western countries), in which opposing political parties find co ...
commission "to study and report specific recommendations to preserve Social Security for seniors while building wealth for younger Americans", with the specific directive that it consider only how to incorporate "individually controlled, voluntary personal retirement accounts".
The majority of members serving on
Bill Clinton
William Jefferson Clinton (né Blythe III; born August 19, 1946) is an American politician who served as the 42nd president of the United States from 1993 to 2001. He previously served as governor of Arkansas from 1979 to 1981 and again ...
's similar Social Security commission in 1996 had recommended through their own report that partial privatization be implemented.
Bush's Commission to Strengthen Social Security (CSSS) issued a report in December 2001 (revised in March 2002), which proposed three alternative plans for partial privatization:
* Plan I: Up to two percent of taxable wages could be diverted from FICA and voluntarily placed by workers into private accounts for investment in stocks, bonds, and/or mutual funds.
* Plan II: Up to four percent of taxable wages, up to a maximum of $1,000, could be diverted from FICA and voluntarily placed by workers into private accounts for investment.
* Plan III: One percent of wages on top of FICA, and 2.5% diverted from FICA up to a maximum of $1000, could be voluntarily placed by workers into private accounts for investment.
On February 2, 2005, Bush made Social Security a prominent theme of his
State of the Union Address
The State of the Union Address (sometimes abbreviated to SOTU) is an annual message delivered by the president of the United States to a joint session of the United States Congress near the beginning of each calendar year on the current conditio ...
. In this speech, which sparked the debate, it was Plan II of CSSS's report that Bush outlined as the starting point for changes in Social Security. He outlined, in general terms, a proposal based on partial privatization. After a phase-in period, workers currently less than 55 years old would have the option to set aside four percentage points of their payroll taxes in individual accounts that could be invested in the private sector, in "a conservative mix of bonds and stock funds". Workers making such a choice might receive larger or smaller benefits than if they had not done so, depending on the performance of the investments they selected.
Although Bush described the Social Security system as "headed for
bankruptcy
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor ...
", his proposal would not affect the projected shortfall in Social Security tax receipts. Partial privatization would mean that some workers would pay less into the system's general fund and receive less back from it. Administration officials said that the proposal would have a "net neutral effect" on the system's financial situation, and that Bush would discuss with Congress how to fill the projected shortfall.
The
Congressional Budget Office
The Congressional Budget Office (CBO) is a List of United States federal agencies, federal agency within the United States Congress, legislative branch of the United States government that provides budget and economic information to Congress.
Ins ...
had previously analyzed the commission's "Plan II" (the plan most similar to Bush's proposal) and had concluded that the individual accounts would have little or no overall effect on the system's solvency, and that virtually all the savings would come instead from changing the benefits formula.
As illustrated by the CBO analysis, one possible approach to the shortfall would be benefit cuts that would affect all retirees, not just those choosing the private accounts. Bush alluded to this option, mentioning some suggestions that he linked to various former
Democratic officeholders. He did not endorse any specific benefit cuts himself, however. He said only, "All these ideas are on the table." He expressed his opposition to any increase in Social Security taxes. Later that month, his press secretary,
Scott McClellan
Scott McClellan (born February 14, 1968) is the former White House Press Secretary (2003–06) for President George W. Bush, he was the 24th person to hold this post. He was also the author of a controversial No. 1 ''New York Times'' bestseller ...
, ambiguously characterized raising or eliminating the cap on income subject to the tax as a tax increase that Bush would oppose.
In his speech, Bush did not address the issue of how the system would continue to provide benefits for current and near-future retirees if some of the incoming Social Security tax receipts were to be diverted into private accounts. A few days later, however,
Vice-President
A vice president, also director in British English, is an officer in government or business who is below the president (chief executive officer) in rank. It can also refer to executive vice presidents, signifying that the vice president is on t ...
Dick Cheney
Richard Bruce Cheney ( ; born January 30, 1941) is an American politician and businessman who served as the 46th vice president of the United States from 2001 to 2009 under President George W. Bush. He is currently the oldest living former U ...
stated that the plan would require borrowing $758 billion over the period 2005 to 2014; that estimate has been criticized as being unrealistically low.
On April 28, 2005, Bush held a televised
press conference
A press conference or news conference is a media event in which notable individuals or organizations invite journalists to hear them speak and ask questions. Press conferences are often held by politicians, corporations, non-governmental organ ...
at which he provided additional detail about the proposal he favored. For the first time, he endorsed reducing the benefits that some retirees would receive. He endorsed a plan from
Robert Pozen
Robert Charles Pozen known as "Bob" (born 1946) is an American financial executive with a strong interest in public policy. Pozen currently teaches executives about how to be more productive and serves as an executive coach and mentor, www.bobpozen ...
, described below in the section regarding suggestions for Social Security that do not involve privatization.
Although Bush's State of the Union speech left many important aspects of his proposal unspecified, debate began on the basis of the broad outline he had given.
Politics of the dispute over Bush's proposal
The political heat was turned up on the issue since Bush mentioned changing Social Security during the
2004 elections, and since he made it clear in his nationally televised January 2005 speech that he intended to work to partially privatize the system during his second term.
To assist the effort,
Republican
Republican can refer to:
Political ideology
* An advocate of a republic, a type of government that is not a monarchy or dictatorship, and is usually associated with the rule of law.
** Republicanism, the ideology in support of republics or agains ...
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 fiscally conservative
501(c)4 organization
Club for Growth
The Club for Growth is a 501(c)(4) conservative organization active in the United States, with an agenda focused on cutting taxes and other economic policy issues. Club for Growth's largest funders are the billionaires Jeff Yass and Richard U ...
and the securities industry.
In 1983, a
Cato Institute
The Cato Institute is an American libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Ed Crane, Murray Rothbard, and Charles Koch, chairman of the board and chief executive officer of Koch Industries.Koch Ind ...
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".
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.
A group backed by
labor union
A trade union (labor union in American English), often simply referred to as a union, is an organization of workers intent on "maintaining or improving the conditions of their employment", ch. I such as attaining better wages and benefits ( ...
s called "Americans United to Protect Social Security" "set its sights on killing Bush's privatization plan and silencing his warnings that Social Security was 'headed toward bankruptcy.'"
On January 16, 2005, the ''
New York Times
''The New York Times'' (''the Times'', ''NYT'', or the Gray Lady) is a daily newspaper based in New York City with a worldwide readership reported in 2020 to comprise a declining 840,000 paid print subscribers, and a growing 6 million paid d ...
'' 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".
Coming soon after the disclosure of government payments to commentator
Armstrong Williams
Armstrong Williams (born February 5, 1962) is an American political commentator, entrepreneur, author, and talk show host. Williams writes a nationally syndicated conservative newspaper column, has hosted a daily radio show, and hosts a nationa ...
to promote the
No Child Left Behind Act
The No Child Left Behind Act of 2001 (NCLB) was a U.S. Act of Congress that reauthorized the Elementary and Secondary Education Act; it included Title I provisions applying to disadvantaged students. It supported standards-based education ...
, the revelation prompted the objection from Dana C. Duggins, a vice president of the Social Security Council of the
American Federation of Government Employees
The American Federation of Government Employees (AFGE) is an American labor union representing over 670,000 employees of the federal government, about 5,000 employees of the District of Columbia, and a few hundred private sector employees, mo ...
, that "Trust fund dollars should not be used to promote a political agenda."
In the weeks following his State of the Union speech, Bush devoted considerable time and energy to campaigning for privatization. He held "town meetings" at many locations around the country. Attendance at these meetings was controlled to ensure that the crowds would be supportive of Bush's plan. In
Denver
Denver () is a consolidated city and county, the capital, and most populous city of the U.S. state of Colorado. Its population was 715,522 at the 2020 census, a 19.22% increase since 2010. It is the 19th-most populous city in the Unit ...
, for example, three people who had obtained tickets through Representative
Bob Beauprez
Robert Louis Beauprez (; born September 22, 1948) is an American politician and member of the Republican Party from the state of Colorado.
Beauprez is a Colorado native and graduate of the University of Colorado Boulder. He worked as a dairy fa ...
, a Republican, were nevertheless ejected from the meeting before Bush appeared, because they had arrived at the event in a car with a bumper sticker reading "No More Blood for Oil".
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
The 2003 invasion of Iraq was a United States-led invasion of the Republic of Iraq and the first stage of the Iraq War. The invasion phase began on 19 March 2003 (air) and 20 March 2003 (ground) and lasted just over one month, including 26 ...
.
[ (80k external PDF file)]
A dispute between the
AARP
AARP (formerly called the American Association of Retired Persons) is an interest group in the United States focusing on issues affecting those over the age of fifty. The organization said it had more than 38 million members in 2018. The magazin ...
and a
conservative
Conservatism is a cultural, social, and political philosophy that seeks to promote and to preserve traditional institutions, practices, and values. The central tenets of conservatism may vary in relation to the culture and civilization i ...
group for older Americans,
USA Next
USA Next (also known as USA United Generations), formerly known as the United Seniors Association, is a United States lobbyist group whose slogan is "Building a Legacy of Freedom for America's Families". It presents itself as a conservative senior ...
, cropped up around the time of the State of the Union speech. The AARP had supported Bush's plan for major changes in
Medicare in 2003, but it opposed his Social Security privatization initiative. In January 2005, before the State of the Union Address, the AARP ran advertisements attacking the idea. In response, USA Next launched a campaign against AARP. Charlie Jarvis of USA Next stated: "They
ARPare the boulder in the middle of the highway to personal savings accounts. We will be the dynamite that removes them."
The tone of the debate between these two interest groups is merely one example among many of the tone of many of the debates, discussions, columns,
advertisements
Advertising is the practice and techniques employed to bring attention to a product or service. Advertising aims to put a product or service in the spotlight in hopes of drawing it attention from consumers. It is typically used to promote a ...
, articles, letters, and
white papers
A white paper is a report or guide that informs readers concisely about a complex issue and presents the issuing body's philosophy on the matter. It is meant to help readers understand an issue, solve a problem, or make a decision. A white paper ...
that Bush's proposal, to touch the "third rail", has sparked among politicians, pundits, thinktankers, and taxpayers.
Immediately after Bush's State of the Union speech, a national poll brought some good news for each side of the controversy.
Only 17% of the respondents thought the Social Security system was "in a state of crisis", but 55% thought it had "major problems". The general idea of allowing private investments was favored by 40% and opposed by 55%. Specific proposals that received more support than opposition (in each case by about a two-to-one ratio) were "Limiting benefits for wealthy retirees" and "Requiring higher income workers to pay Social Security taxes on ALL of their wages". The poll was conducted by ''
USA Today
''USA Today'' (stylized in all uppercase) is an American daily middle-market newspaper and news broadcasting company. Founded by Al Neuharth on September 15, 1982, the newspaper operates from Gannett's corporate headquarters in Tysons, Virgini ...
'',
CNN
CNN (Cable News Network) is a multinational cable news channel headquartered in Atlanta, Georgia, U.S. Founded in 1980 by American media proprietor Ted Turner and Reese Schonfeld as a 24-hour cable news channel, and presently owned by ...
, and the
Gallup Organization
Gallup, Inc. is an American analytics and advisory company based in Washington, D.C. Founded by George Gallup in 1935, the company became known for its public opinion polls conducted worldwide. Starting in the 1980s, Gallup transitioned its bu ...
.
Bush's April press conference detailed the proposal further, with Bush describing his preference in "a reform system should protect those who depend on Social Security the most" and describing his proposal as "a Social Security system in the future where benefits for low-income workers will grow faster than benefits for people who are better off."
Opponents countered that middle-class retirees would experience cuts, and that those below the poverty line would receive only what they are entitled to under current law.
Democrats also expressed concern that a Social Security system that primarily benefited the poor would have less widespread political support.
Finally, the issue of private accounts continued to be a divisive one. Many legislators remained opposed or dubious, while Bush, in his press conference, said he felt strongly about the point.
Despite Bush's emphasis on the issue, many Republicans in Congress were not enthusiastic about his proposal, and Democrats were unanimously opposed. In late May 2005,
House Majority Whip
Party leaders of the United States House of Representatives, also known as floor leaders, are congresspeople who coordinate legislative initiatives and serve as the chief spokespersons for their parties on the House floor. These leaders are ele ...
Roy Blunt
Roy Dean Blunt (born January 10, 1950) is an American politician serving as the senior United States senator for Missouri, a seat he was first elected to in 2010. A member of the Republican Party, he previously served as the 33rd Missouri Sec ...
listed the "priority legislation" to be acted on after
Memorial Day
Memorial Day (originally known as Decoration Day) is a federal holiday in the United States for mourning the U.S. military personnel who have fought and died while serving in the United States armed forces. It is observed on the last Monda ...
; Social Security was not included,
and Bush's proposal was considered by many to be dead. In September, some Congressional Republicans pointed to the budgetary problems caused by
Hurricane Katrina
Hurricane Katrina was a destructive Category 5 Atlantic hurricane that caused over 1,800 fatalities and $125 billion in damage in late August 2005, especially in the city of New Orleans and the surrounding areas. It was at the time the cost ...
as a further obstacle to acting on the Bush proposal.
Congress did not enact any major changes to Social Security in 2005, or before its pre-election adjournment in 2006.
During the campaigning for the
2006 midterm election, Bush stated that reviving his proposal for privatizing Social Security would be one of his top two priorities for his last two years in office.
In 2007, he continued to pursue that goal by nominating Andrew Biggs, a privatization advocate and former researcher for the Cato Institute, to be deputy commissioner of the Social Security Administration. When the Senate did not confirm Biggs, Bush made a
recess appointment
In the United States, a recess appointment is an appointment by the president of a federal official when the U.S. Senate is in recess. Under the U.S. Constitution's Appointments Clause, the President is empowered to nominate, and with the advi ...
, enabling Biggs to hold the post without Senate confirmation until December 2008. During his last days in office, Bush said that spurring the debate on Social Security was his most effective achievement during his presidency.
Other concerns
Some allege that
George W. Bush is opposed to Social Security on
ideological
An ideology is a set of beliefs or philosophies attributed to a person or group of persons, especially those held for reasons that are not purely epistemic, in which "practical elements are as prominent as theoretical ones." Formerly applied prim ...
grounds, regarding it as a form of governmental redistribution of income, which other groups such as
libertarians
Libertarianism (from french: libertaire, "libertarian"; from la, libertas, "freedom") is a political philosophy that upholds liberty as a core value. Libertarians seek to maximize autonomy and political freedom, and minimize the state's enc ...
strongly oppose.
Some of the critics of Bush's plan argued that its real purpose was not to save the current Social Security system, but to lay the groundwork for dismantling it. They note that, in 2000, when Bush was asked about a possible transition to a fully privatized system, he replied: "It's going to take a while to transition to a system where personal savings accounts are the predominant part of the investment vehicle...This is a step toward a completely different world, and an important step."
His comment is consonant with the
Cato Institute
The Cato Institute is an American libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Ed Crane, Murray Rothbard, and Charles Koch, chairman of the board and chief executive officer of Koch Industries.Koch Ind ...
's reference in 1983 to a "
Leninist
Leninism is a political ideology developed by Russian Marxist revolutionary Vladimir Lenin that proposes the establishment of the dictatorship of the proletariat led by a revolutionary vanguard party as the political prelude to the establishme ...
strategy" for "
guerrilla warfare
Guerrilla warfare is a form of irregular warfare in which small groups of combatants, such as paramilitary personnel, armed civilians, or Irregular military, irregulars, use military tactics including ambushes, sabotage, Raid (military), raids ...
" against both the current Social Security system and the coalition that supports it."
Critics of the system, such as
Nobel Laureate
The Nobel Prizes ( sv, Nobelpriset, no, Nobelprisen) are awarded annually by the Royal Swedish Academy of Sciences, the Swedish Academy, the Karolinska Institutet, and the Norwegian Nobel Committee to individuals and organizations who make out ...
economist
An economist is a professional and practitioner in the social sciences, social science discipline of economics.
The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this ...
Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
, have said that Social Security redistributes wealth from the poor to the wealthy. Workers must pay 12.4%, including a 6.2% employer contribution, on their wages below the
Social Security Wage Base
For the Old Age, Survivors and Disability Insurance (OASDI) tax or Social Security tax in the United States, the Social Security Wage Base (SSWB) is the maximum earned gross income or upper threshold on which a wage earner's Social Security tax may ...
($102,000 in 2008), but no tax on income in excess of this amount. Therefore, high earners pay a lower percentage of their total income, resulting in a
regressive tax
A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high t ...
. The benefit paid to each worker is also calculated using the wage base on which the tax was paid. Changing the system to tax all earnings without increasing the benefit wage base would result in the system being a
progressive tax
A progressive tax is a tax in which the tax rate increases as the taxable amount increases.Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), ''Concepts of Taxation'', Dryden Press: Fort Worth, TX The term ''progre ...
.
Furthermore, wealthier individuals generally have higher life expectancies and thus may expect to receive larger benefits for a longer period than poorer taxpayers, often minorities. A single individual who dies before age 62, who is more likely to be poor, receives no retirement benefits despite years of paying Social Security tax. On the other hand, an individual who lives to age 100, who is more likely to be wealthy, is guaranteed payments that are more than he or she paid into the system.
A factor working against wealthier individuals and in favor of the poor with little other retirement income is that Social Security benefits become subject to federal income tax based on income. The portion varies with income level, 50% at $32,000 rising to 85% at $44,000 for married couples in 2008. This does not just affect those that continue to work after retirement. Unearned income withdrawn from tax deferred retirement accounts, like
IRAs
The Infrared Astronomical Satellite (Dutch: ''Infrarood Astronomische Satelliet'') (IRAS) was the first space telescope to perform a survey of the entire night sky at infrared wavelengths. Launched on 25 January 1983, its mission lasted ten mo ...
and
401(k)
In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodical employee contributions come directly out of their ...
s, counts towards taxation of benefits.
Still other critics focus on the quality of life issues associated with Social Security, claiming that while the system has provided for retiree pensions, their quality of life is much lower than it would be if the system were required to pay a fair rate of return. The party leadership on both sides of the aisle have chosen not to frame the debate in this manner, presumably because of the unpleasantness involved in arguing that current retirees would have a much higher quality of life if Social Security legislation mandated returns that were merely similar to the interest rate the U.S. government pays on its borrowings.
Effects of the gift to the first generation
It has been argued that the first generation of social security participants have, in effect, received a large gift, because they received far more benefits than they paid into the system. The term associated with this historical imbalance has been coined "legacy debt".
Robert J. Shiller
Robert James Shiller (born March 29, 1946) is an American economist, academic, and author. As of 2019, he serves as a Sterling Professor of Economics at Yale University and is a fellow at the Yale School of Management's International Center for ...
noted that "the initial designers of the Social Security System in 1935 had envisioned the building of a large trust fund", but "the 1939 amendments and subsequent changes prevented this from happening".
As such, the gift to the first generation is necessarily borne by subsequent generations. In this pay-as-you-go system, current workers are paying the benefits of the previous generation, instead of investing for their own retirement,
and therefore, attempts at privatizing Social Security could result in workers having to pay twice: once to fund the benefits of current retirees, and a second time to fund their own retirement.
Claims of pyramid- or Ponzi-scheme similarities
Critics have asserted that the funding mechanism of Social Security's pay-as-you-go funding mechanism has similarities with an illegal
Ponzi scheme
A Ponzi scheme (, ) is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. Named after Italian businessman Charles Ponzi, the scheme leads victims to believe that profits are comin ...
, where early investors are paid off out of the funds collected from later investors instead of from
profits from business activity. In particular, they describe a sustainability problem that they say happens when the number of new contributors declines.
William G. Shipman of the
Cato Institute
The Cato Institute is an American libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Ed Crane, Murray Rothbard, and Charles Koch, chairman of the board and chief executive officer of Koch Industries.Koch Ind ...
argues:
In common usage a trust fund
A trust is a legal relationship in which the holder of a right gives it to another person or entity who must keep and use it solely for another's benefit. In the Anglo-American common law, the party who entrusts the right is known as the "settl ...
is an estate of money and securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
held in trust for its beneficiaries
A beneficiary (also, in trust law, '' cestui que use'') in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example, the beneficiary of a life insurance policy is the perso ...
. The Social Security Trust Fund is quite different. It is an accounting of the difference between tax and benefit flows. When taxes exceed benefits, the federal government
A federation (also known as a federal state) is a political entity characterized by a union of partially self-governing provinces, states, or other regions under a central federal government (federalism). In a federation, the self-governin ...
lends itself the excess in return for an interest-paying bond, an IOU
An IOU (Abbreviation, abbreviated from the phrase "I owe you") is usually an informal document acknowledging debt. An IOU differs from a promissory note in that an IOU is not a negotiable instrument and does not specify repayment terms such as th ...
that it issues to itself. The government then spends its new funds on unrelated projects such as bridge repairs, defense, or food stamps. The funds are not invested for the benefit of present or future retirees.
This criticism is not new. In his
1936 presidential campaign, Republican
Alf Landon
Alfred Mossman Landon (September 9, 1887October 12, 1987) was an American oilman and politician who served as the 26th governor of Kansas from 1933 to 1937. A member of the Republican Party, he was the party's nominee in the 1936 presidential ...
called the trust fund "a cruel hoax". The
Republican's party platform
A political party platform (US English), party program, or party manifesto (preferential term in British & often Commonwealth English) is a formal set of principle goals which are supported by a political party or individual candidate, in order ...
that year stated, "The so-called reserve fund estimated at forty-seven billion dollars for old age insurance is no reserve at all, because the fund will contain nothing but the Government's promise to pay, while the taxes collected in the guise of
premiums will be wasted by the Government in reckless and extravagant political schemes."
The
Social Security Administration
The United States Social Security Administration (SSA) is an Independent agencies of the United States government, independent agency of the Federal government of the United States, U.S. federal government that administers Social Security (United ...
responds to the criticism as follows:
See also
*
Generational accounting
Generational accounting is a method of measuring the fiscal burdens facing current and future generations. Generational accounting considers how much each adult generation, on a per person basis, is likely to pay in future taxes net of transfer p ...
*
List of Social Security legislation (United States)
* 1935 - Social Security Act">List of United States federal legislation-->
* 1935 - Social Security Act,
* 1939 - Social Security Amendments of 1939,
* 1942 - Revenue Act of 1942,
* 1943 -
* 1943 - Revenue Act of 1943,
* 1945 - Federal Insur ...
*
Pensions crisis
The pensions crisis or pensions timebomb is the predicted difficulty in paying for corporate or government employment retirement pensions in various countries, due to a difference between pension obligations and the resources set aside to fund the ...
*
Social Security (United States)
In the United States, Social Security is the commonly used term for the federal Old-Age, Survivors, and Disability Insurance (OASDI) program and is administered by the Social Security Administration (SSA). The original Social Security Act ...
for both information about the program, as it currently exists, and historical information about the creation of the program in the mid-1930s and the controversies at that time.
*
Welfare's effect on poverty
The effects of social welfare on poverty have been the subject of various studies.
Studies have shown that in welfare states, poverty decreases after countries adopt welfare programs.Lane Kenworthy, Kenworthy, L. (1999)Do social-welfare policies ...
References
*
*
Further reading
(By chlonogical order:)
*
*
*
*Alan M. Jacobs, “
Policymaking as Political Constraint: Institutional Development in the U.S. Social Security Program," in James Mahoney and Kathleen Thelen, Explaining Institutional Change: Ambiguity, Agency and Power. Cambridge: Cambridge University Press 2010.
*
Congressional Budget Office - Social Security Policy Options - July 2010Center on Budget and Policy Priorities - What the 2012 Trustees Report Shows About Social Security-May 2012
External links
WSJ – Social Security Policy Options Interactive Graphic – June 2011
Articles
Be not afraid: personal accounts are no radical idea— The American Enterprise — March 2005
CommUnity of Minds: Working Together — The $44 Trillion Abyss – 2003 Fortune Magazine— from
FactCheck
FactCheck.org is a nonprofit website that aims to reduce the level of deception and confusion in U.S. politics by providing original research on misinformation and hoaxes. It is a project of the Annenberg Public Policy Center of the Annenberg ...
* José Piñera, "Retiring in Chile", ''
The New York Times
''The New York Times'' (''the Times'', ''NYT'', or the Gray Lady) is a daily newspaper based in New York City with a worldwide readership reported in 2020 to comprise a declining 840,000 paid print subscribers, and a growing 6 million paid ...
'', December 1, 2004
Retiring in Chile– ''Cato Journal'', Vol. 15 No. 2-3
Getting a grip on Social Security: The flaw in the systemSocial Security Suicideat AlterNet
Arno Tausch (2005) ‚World Bank Pension reforms and development patterns in the world system and in the “Wider Europe”. A 109 country investigation based on 33 indicators of economic growth, and human, social and ecological well-being, and a European regional case study’. A slightly re-worked version of a paper, originally presented to the Conference on “Reforming European pension systems In memory of Professor
Franco Modigliani
Franco Modigliani (18 June 1918 – 25 September 2003) was an Italian-American economist and the recipient of the 1985 Nobel Memorial Prize in Economics. He was a professor at University of Illinois at Urbana–Champaign, Carnegie Mellon Uni ...
. 24 and 25 September 2004", Castle of Schengen, Luxembourg Institute for European and International Studies
"The Fake Crisis"— ''
Rolling Stone
''Rolling Stone'' is an American monthly magazine that focuses on music, politics, and popular culture. It was founded in San Francisco, San Francisco, California, in 1967 by Jann Wenner, and the music critic Ralph J. Gleason. It was first kno ...
''
US Government Accountability Office, ''Social Security Reform: Answers to Key Questions''"What Does Price Indexing Mean for Social Security Benefits?"— from Center for Retirement Research, January, 2005 (explanation of wage indexing versus price indexing)
by economist Doug Orr
*
ttp://www.cbpp.org/cms/index.cfm?fa=view&id=3261 Center on Budget and Policy Priorities – Policy Basics: Top Ten Facts about Social Security on the Program's 75th AnniversaryA Carbon tax social security sovereign wealth fund The Unwarranted Attack on Social Safety Nets
Speeches
**
ttp://www.factcheck.org/article305.html "Bush's State of the Union: Social Security 'Bankruptcy?'"— FactCheck.org commentary on the speech
FRB: Testimony, Greenspan — Economic outlook and current fiscal issues — February 25, 2004Social Security Under Attack: Cuts Proposed, Higher Retirement Age Suggested– video report by ''
Democracy Now!
''Democracy Now!'' is an hour-long American TV, radio, and Internet news program hosted by journalists Amy Goodman (who also acts as the show's executive producer), Juan González, and Nermeen Shaikh. The show, which airs live each weekday at ...
''
{{DEFAULTSORT:Social Security Debate (United States)
Debate
Debate is a process that involves formal discourse on a particular topic, often including a moderator and audience. In a debate, arguments are put forward for often opposing viewpoints. Debates have historically occurred in public meetings, a ...
United States economic policy