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The destiny of Social Security

The issues we face today are often muddled by a plethora of media outlets. Whom to believe? Often, the points of the issues can get distorted or exaggerated. And all too often, we don’t discuss the issues, and when we do, we don’t always listen with an open mind. We hang on to our opinions like a spider to its web. Most of the issues are not black and white; they’re gray.This column is not about one particular person’s opinion. This column is about “why and how.” The sources are reputable organizations. If we don’t include statistics in some areas, it’s because we don’t trust where they came from. Stats can be skewed to anyone’s agenda, too.Any national issue is up for discussion. We’ll take it on – with respect to all sides.The Social Security program is the largest government program in the world and the single greatest expenditure. In 2008, Social Security expenses in the U.S. were 20.8 percent of the federal budget – $612 billion out of $2.9 trillion.Can a system that was defined in the 30s remain viable decades later?How it all beganAt the end of the Civil War, thousands of women and children had lost husbands and fathers. Thousands of soldiers had been disabled. The government responded by creating the first full-fledged pension program.Widows and orphans received pensions equal to the pay the deceased soldier would have received had he been disabled. In 1890, the program was extended to any disabled Civil War veteran, regardless of the circumstances of his disability. In 1906, the government added old-age benefits for Civil War survivors.By 1910, 90 percent of all Civil War veterans were receiving benefits under the program.Twenty-four years later, the Great Depression affected more than half of elderly people’s income in the country. States began providing old-age pensions. By 1935, 30 states had enacted some form of an old-age benefit program. The statewide programs were inadequate, and only about 3 percent of the elderly in the U.S. were receiving benefits.President Theodore Roosevelt then proposed a federal social insurance program that would provide economic security to seniors by creating a work-related system, where workers contributed through taxes they paid while employed. The tax would be specific to the program, allowing workers to build a retirement savings account.The Social Security Act of 1935 passed during the height of the Great Depression. The Act spawned numerous programs, but the social insurance program to pay retired workers age 65 or older a continuing income post-retirement was benchmark legislation.The Act has been amended many times. In 1939, benefits were extended to surviving spouses and minor children. During the 1950s, the first cost of living increase since 1940 went into effect. In 1972, the law changed to provide a cost of living increase, or COLA, each year, based on inflation.In 1983, President Ronald Reagan signed legislation that would tax Social Security benefits for the first time. The original Social Security Act of 1935 set the minimum age for receiving full retirement benefits at 65. In 2000, the retirement age increased from 65 to 67 over a 22-year period, with an 11-year hiatus at which the retirement age will remain at 66.In 2000, President Bill Clinton signed legislation eliminating the Retirement Earnings Test, allowing seniors above the retirement age to work without a reduction in benefits.Social Security today … maybe tomorrowSocial Security checks for retired workers and their dependents average $1,170 monthly; one in two married couples and three in four single people rely on Social Security for at least half their income. Of those who received benefits in 2008, Social Security was the primary source of income for 64 percent. About a third of recipients relied on Social Security benefits for at least 90 percent of their income.For those who depend on Social Security, there will be no cost-of-living raise again in 2011; however, President Obama will ask Congress for a one-time $250 bonus for recipients.Things have dramatically changed since Roosevelt signed the Social Security provision into law. When the Social Security Act was signed in 1935, life expectancy was 77.5 years. In 2009, it’s 83 years.As they age, the baby boomers have been referred to as America’s “silver tsunami.” By 2030, almost one in five Americans will be 65 and older. By 2040, the number of Americans age 65 and older will have increased to 81.2 million – from 40.2 million in 2010.According to the 2009 Social Security Board of Trustees annual report, Social Security faces a budget shortfall of more than $15 trillion over the next 75 years. Benefits distributed will exceed Social Security taxes by 2016.Upping the retirement age over the years and increasing payroll taxes were two measures decided in the 1980s to keep Social Security solvent through 2058. That projection has lost 20 years – it’s now 2037. Beginning in 2037, reserve funds will not be paying benefits – FICA taxes will. Social Security is projected to have only enough tax income to pay 76 percent of scheduled benefits.It’s been repeatedly said that Social Security is facing a deficit because the government is robbing Peter to pay Paul. Is Social Security losing money from government “raids”?This is straight from the “horse’s mouth” (SSA): “By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are “special issues” of the United States Treasury. Such securities are available only to the trust funds.”The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.”So, what’s happening?Besides an aging society, when Social Security began in 1935, the contributions of 17 workers paid for the benefits of one retiree. The estimated ratio for 2035 is 2.1 workers per beneficiary.Skyrocketing unemployment rates and declining payroll taxes during the recession have put another nail in the Social Security coffin. Retired workers who took benefits increased by 20 percent. And add a 5.8 percent raise in Social Security benefits in 2008 to mitigate soaring energy rates.PrivatizingPresident George W. Bush and some members of Congress have promoted privatizing Social Security benefits as THE answer to an impending deficit.The Pro sideThose who are pro privatization believe that saving Social Security as the system is will require cuts in benefits, more borrowing or hefty tax hikes. A middle-class American born post 1965 should expect a 2 percent rate of return with the existing Social Security system. Private investments in the U.S. average a return of almost 8 percent. Federally regulated personal accounts would allow individuals to invest only in diversified, approved mutual funds and not in single stocks or highly volatile stocks.Keeping money in private accounts will prevent the use of surplus money for other government-related purposes. Privatizing would boost economic growth and allow individuals control over their investment decisions.Removing the federal government as the required entity to provide retirement benefits limits a burgeoning bureaucracy.Private accounts will be taxed through the regular process of income taxation. Because of the Great Depression, people were in desperate need of government assistance. But some believe that today it’s about dependency on a system, and privatizing is a more modern way to approach retirement saving plans.Inarguably, many of today’s recipients get back more than they paid in Social Security taxes. They simply lived well beyond the plan! Advocates of privatization want the government to act now – not wait for the ball to drop. Postponing change is not fair to the younger people.ConIf Social Security benefits were privatized now, there would be substantial reductions in traditional Social Security benefits. It would be too costly to make a transition – paying the current beneficiaries while making the change. Those financial costs have been estimated at an extra $1 to $2 trillion.Investments under the stock market are risky. Does every American have access to reputable investment counselors? Privatizing Social Security will decentralize it and make investments vulnerable to all kinds of situations, from crooked investment counselors to stock market crashes. Privatizing lines the pockets of Wall Street.Social Security taxes balance the system for all wage earners. With privatization, higher wage earners will be able to take bigger risks for higher investments, leaving out low and moderate income workers.The naysayers of privatization say that reasonable tax hikes and spending changes will resolve the issue.As people live longer, they will work longer. Labor markets will tighten, and employers will be offering enticements for older workers to remain on the job.Currently, the average age for retiring is 62.Some believe the investment pool created by personal accounts would be difficult to regulate and could distort capital markets and equity valuations. It’s not good business to take risks with essential retirement benefits.But …Reform bills have been introduced in droves to resolve Social Security downfalls.But given the polarization of our governing bodies, the likelihood of a fix anytime soon is like chasing the lottery – unless our legislators bag politics for common sense. Here’s a good example.Sen. Harry Reid, D-Nev., had this to say about Social Security reform: “They use scare tactics to frighten Americans young and old to believe that the program is teetering on the edge of bankruptcy. But that’s just factually wrong,” he said. “Whether you call it phasing out, privatizing, personalizing, these words are all code words for the same things, ‘We’re going to kill Social Security.'”Has Reid read the 2009 annual report from the Social Security Board of Trustees? Waiting to address the facts from the report is in the best interest of whom?Opponents of privatization say that baby boomers will work longer and keep contributing to the system. I’m not convinced. A majority of the baby boomers I know are retired or planning to retire by age 62.Are employers actively baiting their older workers in an effort to keep them? What we’ve seen in this recession is an over abundance of unemployed older workers. Only 23.3 percent of youths unemployed in 2009 were jobless for 27 weeks or more, compared to 39.4 percent of older workers. Older workers experienced an average of 29.5 weeks of unemployment – the longest among all age groups.The theory that companies will lure older workers to remain on the job because of a tight job market is a myth.What scares me about privatization? According to the National Alliance to End Homelessness, 10 percent of seniors live below the poverty line, one million seniors live in extreme poverty and more than 44,000 seniors are homeless. In the next 10 years, the number of homeless seniors will increase by one-third; in 2050, that figure will jump to 54 percent. I can’t help but agree with this statement from the alliance: If a nation can be judged by how it treats its weakest, then prepare for the entire United States to be obliterated by a giant lightning bolt any second now.Would privatizing Social Security put more seniors on the streets?Questions/ideasIf privatization is the answer, what are the proposed safeguards for investments? How will they mandate personal investments? How will we pay for the baby boomers’ Social Security benefits, if the younger workers are privatizing even a portion of their deductions? How do we ensure fair investment opportunity for ALL workers?Raising taxes and the retirement age are options, but how much and how often? Are these solutions a mere Band-Aid?It’s been brought up that legalizing undocumented immigrants currently in the country would help pay Social Security deficits. Illegal workers are paying into the system now – up to $12 billion a year – with fake Social Security cards they’ve received to get jobs.What about putting retirement investments solely in the hands of individuals, setting up a tax-based program for low-income or disabled seniors only, much like the government-sponsored aid to dependent children programs?And then there’s the cap. Bill Gates pays as much in Social Security taxes as someone making $100,000 a year. For 2010, earnings above $106,800 are not taxed for Social Security purposes. That’s 16 percent of earnings in this country.An August New York Times op-ed supported raising the cap by just 2 percent each year, so it eventually covered 90 percent of all income. According to the op-ed, it would reduce a third of the Social Security shortfall.Figures from the 2008 Congressional Research Service study show that eliminating the cap could bring in an extra $100 billion a year.Employees and employers each pay 6.2 percent of Social Security tax, but what if we eliminated the employer cap? Lebron James of the Miami Heat makes $14.5 million a year. Eliminating the employer cap would generate $900,000 for Social Security.To abolish the cap now would mean that a small business with a total payroll of $300,000 would pay $18,600 in Social Security taxes, based on the current 6.2 percent. To raise the cap by 2 percent to $108,900, the same employer would pay $6,752. Today, the employer pays $6,621. Is it possible to give America’s wealthy seniors a choice? Do they have to take Social Security or could they, in essence, give it back and maybe get a tax deduction in return?As gray as a rainy dayThis issue is as complicated as any on the government’s plate. One thing is black and white to me: There is a problem with Social Security. The gray areas of privatization, ending the cap, raising taxes, etc. need to be explicitly defined – and the sooner the better. But it cannot be done efficiently without a consensus in Congress that Social Security is in trouble. Further, Congress has to come together to fix it.I am confident that current recipients and most of the baby boomers will not be greatly affected by any changes. Given the state of Washington, many of us might not live to see any resolutions.One thing for sure: If I had children, I’d be pushing them hard to save money for retirement beyond Social Security taxes. And maybe I’d say, put it under the mattress!

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