Understanding Social Security Reform

Techniguy 05-02-2005

In earlier days of America, and up until the twentieth century, older Americans depended on their families to provide for their retirement needs. But as society changed, and families got smaller and more spread out across the country, it occurred to President Roosevelt that a system was needed to provide financial security for the retired. There was a long history building up to that, but on August 14, 1935, Roosevelt signed into law the Social Security Act to provide income for those retired workers age 65 and older.

The Social Security Administration (SSA) began life as the Social Security Board (SSB), and independent and un-funded agency. That didn’t work out too well and in July of 1946, the SSB was renamed the Social Security Administration under the President's Reorganization Plan of 1946. The plan included a trust fund held by the government into which workers would contribute a portion of their wages each payday through withholding taxes. Records were kept and at retirement, workers would begin drawing out on a monthly basis, the money they had put into the system. Sounded like a good idea at the time. Particularly since most people didn’t live too many years beyond retirement and would die before their savings were gone.

Today the situation is different. People live longer and there are many more retired persons drawing Social Security than ever before. In 1946 there were 16 workers paying into the system for every retiree, which allowed the fund to develop a huge surplus. Today, there are only three workers paying in for each retiree and in twelve years there will be only two. Oh, that huge surplus that was in the fund? Congress spent it on other spending programs and left in it’s place, worthless government bonds that can only be paid back by borrowing from other government funds. In other words, IOUs This practice started decades ago and by 1980, the Social Security Trust Fund was nearly gone. Benefits are now being paid right out of the General Fund which means they are borrowing money intended for other purposes and using it to cover their responsibility to Social Security. They are now calling Social Security a “pay as you go plan”. Even if that money were still in the fund, it may not be enough to keep the system solvent for long.

Social Security taxes for workers today are 7.65 percent of their gross pay and withheld along with the income tax from our checks. That means out of every hundred dollars you make, $7.65 goes to Social Security. Or to put it another way, If you make $1000 gross on a check, $76.50 will go into Social Security. With the private accounts that President Bush is proposing, only 4% of that, or $3.06 of that $$76.50 will go into your private account to earn interest, and $73.44 goes into the old SS system which doesn’t earn you a dime. It's not much but it adds up over a lifetime. Another part of the plan calls for a reduction in Social Security benefits by 26% in 2041. By then, the money you have saved in your private account will more than make up for the difference, your benefits will actually be increased by combining both the Social Security and the private account payments. Unfortunately, those over 50 are not eligible for the plan, we're too old. This is intended for younger workers. It will not apply to anyone over 50 today. Those over 50 are stuck with the old system. It’s not likely that any of us will see the year 2041. Private accounts are like an IRA or 401k retirement plan. Pres. Bush is just trying to include a little of those advantages in Social Security.

There is much concern about people not skilled in the Stock Market to be able to manage their own investments. People worry about catastrophes like Enron and fear loosing their retirement. These worries are unfounded. For one thing, this reform plan is about choices, your choices. If you don’t know the Stock Market, you don’t have to. The SSA will have a staff of investment professionals who will invest your money wisely for you. You will have the choice to manage it yourself if you prefer, or you can hire your own broker, it‘s up to you. If the SSA investors handle your investment, the money will be put into a wide range of low risk mutual funds. By spreading the money over a wide variety of stocks, this prevents something like Enron from ruining your retirement. If you have $10,000 invested and 1% of that investment is in a company that goes bankrupt, the most you will loose is $100. But remember, your money will be invested in LOW RISK stocks with a long and proven track record which makes it unlikely that any of your companies will fail. You don’t like Wall Street? No problem. You can have your account invested in government securities and bonds instead. And remember, even after 2041, you will still be receiving 74% of your current SSA retirement benefits. By then, your private account will have grown and be able to pay you more than you could get under the current system. When you die, your private account is passed to your next of kin, unlike with the current system which simply keeps the rest of your money. You own the account, not the government. This is a big plus for families and for your children.

There is a catch though, and this is probably what Democrats in Congress oppose the most. When you take 4% out of the system, that leaves less money going into the system to fund the people now collecting Social Security benefits. That's what the talk about borrowing $2 billion is about... to make up for that loss. If Congress would cut their wasteful spending and pay back the bonds in the SS fund, borrowing $2 billion wouldn’t be necessary but what are the chances of them doing that? You have to ask yourself this question; Who do you trust more with your retirement savings, Wall Street, or Democrats in Congress? Or for that matter, even Republicans. Both have violated your trust and already spent the money you invested in Social Security. I’ll put my trust in Wall Street if I have a choice and let Congress either get their pork money elsewhere or kill the pig. Another measure under consideration and almost sure to pass is raising the SSA retirement age from 65 to 67. That gives Social Security two more years to collect funds and cuts two years off of everyone’s retirement years representing a big savings to the Social Security system.

The Demos say they can fix the problem just by raising everyone's taxes. That's their solution to everything. Do you want your taxes raised to fix a system that Congress screwed up? Why not hold their feet to the fire and hold them responsible for their deeds? They never suggest cutting their spending and paying back the IOUs. Even that would be only a temporary solution until the Baby Boomers all die but then again, that just might be long enough. So to keep the system alive, there has to be other measures other than just adding private accounts which only enhance retirement checks and keep Congress from spending your money. The answer would be to convert the entire system into private accounts as they’ve done in Galveston Texas where they have opted out of the Social Security System in favor of private investment accounts. The money is still withheld from their checks but doesn’t go to the federal government but rather to their personal account. A retiree in Galveston who would be getting $1600 a month from SSA is instead getting about $3500 a month from his private retirement account. This system is not unlike the retirement plan used by Congress and has been successful everywhere including in foreign countries where Social Security is paid entirely by investments in Stocks and Bonds.

But that would leave all of us who will be retiring soon and those already retired without any money in the “pay as you go system” since Congress already spent the surplus, and workers taxes would be going to their private accounts. We have to depend on the workers now paying into the system to fund the current SSA checks instead of paying our money back to us that we paid in, as was originally planned. Yes, the thieves in Congress some 20 or 30 years ago stole all of our SS money and spent it elsewhere. So for the present time, the current system must remain, but I can see it converting more and more over time into private accounts as young workers today grow old and begin collecting from their investments. In time, the whole system could be working more like Galveston’s.

Finally, you should understand that at the present time, everything is still on the table and open to suggestion and discussion. No plan has been decided upon yet. What I have given you here is what is being proposed for consideration by Congress. To me, it sounds like a great plan for the future. Commercial investments are good for the country and good for your retirement. I only regret that this proposed plan wasn’t available when I was young and just starting out in the job market. If it had been, I wouldn’t now be worrying about how I’m going to get by after retirement.


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