Proposals to change Social Security benefits

RidinHighSpeeds · 11-07-2006, 03:23 PM

During many elections, we have heard proposals from politicians to alter or change Social Security benefits. In this paper, I’m going to research and analyze these proposals to find out whether or not they would be beneficial to the Social Security fund, how it will affect all of us in the future, and the current beneficiaries who receive Social Security.

“The key problem for Social Security is that, as the population ages, soon there will not be enough people paying Social Security taxes to provide benefits for every retired person.” (Dilulio & Wilson 486). This is why so many politicians have proposed changes to the current system. The people in my generation might not see any benefits when it’s our time to retire. “In 1950, there were 16 workers to support every one beneficiary of Social Security; today, there are only 3.3 workers supporting every Social Security beneficiary.” (White House). If Social Security stays unchanged at this rate, Social Security will be paying out more than it takes in. If we ever reach this stage we will be left with two problems, a lot of people paying into the system now will be cut off of Social Security, or the government will borrow more money to pay the beneficiaries, which will increase the national debt.

“Unless otherwise stated, payment levels apply equally to aged, blind, and disabled persons.” (State assistance programs for SSI recipients, 3) I believe that if the Social Security fund only funded beneficiaries who are aged, we would not have such a low number today of 3.3 workers supporting every Social Security beneficiary. “The Budget Enforcement Act, for example, excluded the receipts and disbursements of Social Security from the President’s budget and the congressional budget resolution. Programs that have been excluded like this are called “off-budget”.” (Collender 12)

Robert M. Ball has proposed a plan to alter Social Security while arguing against President Bush’s proposal of private accounts. One thing that Ball has proposed was, “Gradually raise the cap on earnings covered by Social Security so that once again 90 percent of all such earnings would be taxed and counted for benefits” (Ball 2). I believe the means of using tax to fix Social Security will work in the short run, but not in the long. If we do take this approach, should we gradually raise the cap on earnings covered by Social Security even more in the future when Social Security has gone further into debt? Another proposed change by Ball was, “An estate tax is a highly progressive way of meeting this cost, and dedicating it to Social Security would strengthen the contributory.” (Ball 3) Now an estate tax, or sometimes called a “death tax”, is a tax on a person’s estate depending on how much he or she was worth. Again, I see a problem with this proposal because Ball is suggesting that we use another means of tax to be paid into Social Security. I personally think it’s wrong to even have an estate tax because those who are taxed an estate tax were most likely small business owners. “More than 70% of family businesses do not survive the second generation; 87% do not make it to the third generation.” (Frequently Asked Questions about the "Death Tax")

During the 2000 elections, President Bush was widely known for his proposals to privatize Social Security. Most of the Democrat’s are against Bush’s proposals to change Social Security, whereas, most Republican’s are for Bush’s proposals to change Social Security. In order to find out whether people would be better off under the current Social Security system or a privatized system, I researched the average returns among the current system and compared them to the average returns under a private investment or “private account”.

Barbara Boxer published a “Social Security to Social Insecurity calculator” (Boxer), that calculates the average return an individual will receive under the current system compared to Bush’s privatization plan. I entered many different salaries and years and at every given circumstance, Bush’s plan resulted in a loss. I found this very disturbing considering the large amounts of research I have done last year on retirement accounts.

Dave Ramsey published a ”Privatizing Social Security calculator” (Ramsey), that calculates the return you could expect depending on the type of fund you choose, your income, and your age. Compared to Barbara Boxer’s calculator, I found this calculator more accurate because you were able to choose a fund that had an average annual return, which is calculated into how much you contribute over a given amount of years. The result from Dave Ramsey’s calculator shows how much you will receive from social security and your private accounts when you retire which resulted in a much higher return than social security.

Last year I took an economics class, which covered a great deal in investing for retirement. Some people who are against Bush’s plan of private accounts state that privatizing social security is too risky for retirement. “For individual investors who have neither the time nor the inclusion to actively monitor a stock or a bong portfolio, mutual funds have an obvious appeal. Just pick a good fund and let the managers do the work for you.” (Groz 105). At the age of 19, I visited Fidelity Investments in Braintree, Massachusetts where I was able to start my own investment portfolio. They showed me many funds that ranged from aggressive growth to conservative growth funds. I then chose a couple of mutual funds that were aggressive growth because I was starting my investing at such a young age. “Many investors draw the inference that they should not invest all their money in a single stock or bond, but rather spread out their investments among a group of securities.” (Groz 106). If private accounts were an option, I would recommend people to diversify their investments into many different funds just to limit risk.

Another benefit from investing in certain types of stocks is the dividends. “Dividends, then, are a dividing up and distribution to shareholders of a portion of the corporation’s earnings.” (Groz 27). With these dividends, you can reinvest them into the stock or fund; “Compounding occurs when you get many (e.g., interest or dividends) from an investment and put it back into the portfolio, letting it grow alongside the original investment.” (Groz 183).

After doing researching and analyzing the proposals offered by many politicians, I feel that privatizing Social Security is not such a bad idea. I feel that privatizing Social Security would give people more control of their money when it comes to saving money for retirement that the government cannot touch. I understand that some people might fear the risks of investing in the stock market, but if someone diversifies and chooses funds that are somewhat conservative, there is a very small risk of having little return. Considering that Social Security today has very little return “Social Security's inflation-adjusted rate of return is only 1.23 percent for an average household of two 30-year-old earners with children in which each parent made just under $26,000 in 1996.” (Beach), you would be better off putting your money into a savings account earning a return close to 3 percent.

“If someone's definition of national debt excludes the debt owed to federal entities, they are not accounting for the interest on the debt owed to federal entities.” (Ruoco). Since the government’s national debt has been rising year after year which can be seen on (http://www.publicdebt.treas.gov/opd/opdhisto4.htm), why should I trust the government with my retirement money? This is why I support the idea of privatizing Social Security, or at least giving the American people the option to invest in private accounts.

Sources

Orr, Doug. "Social Security Q & A: separating fact from fiction." Dollars & Sense 259 (May-June 2005): 15(6).

State assistance programs for SSI recipients. Baltimore, Md. : The Branch, 2002 Jan

Ball, Robert P (2005). “Fixing Social Security” The Century Foundation. 5/3/2005 http://www.socsec.org/facts/Check_Lists/checklist1.PDF

Beach, William W., Gareth E. Davis. "Social Security's Rate of Return." The Heritage Foundation. 15 Jan 1998. 25 Nov. 2005 <http://www.heritage.org/Research/SocialSecurity/CDA98-01.cfm#1>.

Bogle, John C. Common Sense on Mutual Funds : New Imperatives for the Intelligent Investor . San Francisco: John Wiley, 1999.

Boxer, Barbara. "Social Security into Social Insecurity." Social Insecurity. 25 Nov. 2005 <http://boxer.senate.gov/socsec/>.

Brohawn, Dawn K., Norman G. Kurland, and Michael D. Greaney. Capital Homesteading for Every Citizen: A Just Free Market Solution for Saving Social Security. : Center for Economic and Social Justice, 2004.
(Brohawn et al. 256)

Collender, Stanley E. The Guide to the Federal Budget : Fiscal 2000. New York: Century Foundation Press, 1999.

"Frequently Asked Questions about the "Death Tax"." DeathTax. 29 Mar 2001. The Seattle Times. 25 Nov. 2005 <http://www.deathtax.com/deathtax/faq.html>.

Groz, Marc M. Forbes Guide to the Markets : Becoming a Savvy Investor. New York: J. Wiley, 1999.

Hubbard, Glenn. "Happy 70th, Social Security." Business Week August 08 2005.

Ramsey, Dave. "Making the Case for Privatizing Social Security." Social Security Reform. 25 Nov. 2005 <http://www.daveramsey.com/etc/social_security/>.

Ruoco, James. "The Impact of Social Security on the National Debt." JustFacts.com. 1 Sep 2001. 25 Nov. 2005 <http://www.justfacts.com/ssdebtimpact.htm>.

United States. A blueprint for new beginnings : a responsible budget for America’s priorities. Washington, D.C: U.S. G.P.O., 2001.

United States. “U.S. Department of the Treasury, Bureau of the Public Debt.” Historical Debt Outstanding – Annual. 25 Nov. 2005 <http://www.publicdebt.treas.gov/opd/opdhisto4.htm>.

White House. "Strengthening Social Security for Future Generations." Strengthening Social Security. The White House. 25 Nov. 2005 <http://www.whitehouse.gov/infocus/social-security/>.

vharlow · 01-13-2007, 01:35 AM

Riding, good job. I'd argue with one word, - you used inclusion when you should probably have used inclination... Your conclusion, though, is one many have drawn and it's sound. Some worry that the markets themselves would face greater government scrutiny and control than they already do, and cause chaos with disastrous results for the return on investment if everyone in the country were investing their retirement funds there. But, there will always be hysterics. Others think this would be unfair to women because they can't make as much to invest because of taking time out to raise children. Life is unfair to women, especially those that choose to reproduce, but the rewards of reproducing are infinitely greater than a few bucks for retirement.

Now it's up to the democrats, and we will get a less than inspired plan and put off solving the problem for another few decades.

RidinHighSpeeds · 01-13-2007, 07:30 AM

Thank you for the comments vharlow.

I really wish my Social Security wages would be applied towards my personal retirement account, not an IOU account.

chrisg967 · 01-13-2007, 09:20 AM

Those paying into the system probably see privatizing as a good thing as it gives them control over their monies.

Those receiving benefits from the system likely see privatizing as a bad thing as it decreases the amount of money available.

How does one transition without decreasing benefits to recipients, benefits that some may have counted on being there when they retire(d)? (Does anyone plan their retirement strategies based on the Social Security Administration's yearly account of their earnings and likely benefits?)

A required personal finance course in high school (covering how to budget, how interest affects investments and loans, and so on) would be beneficial to all of our children, no matter whether privatizing happens or not.

tristanrobin · 01-13-2007, 09:34 AM

Good paper. I just had my partner read it (a sociology professor) and he had two comments (though he said it was a good paper). He questioned the validity of using Barbara Boxer's report, as she's a well-known Democrat with an agenda - and whether or not Dave Ramsey also is reporting with an agenda. Also, he brought up that if Social Security was privatized there would be many millions of people who just didn't know what to do - or how to follow any kind of plan for investment. When I pointed out that your final statement included "the option to invest," he said that perhaps the final statement/sentence might be broken up. As he put it, LOL, 'the final sentence is quite a mouthful and it's easy to overlook that caveat at the end."

But, good work. It's always good to see young people who will do the work and not just rely on their opinions.

RidinHighSpeeds · 01-16-2007, 06:27 PM

Thanks for the comments.

Tristanrobin, I agree with you that millions of people are not going to know what to do with a privatized account. That's why I support giving the American people an option to privatize. Also, do note, that the plan to privatize Social Security is only a small percentage. I believe the estimate is only around 4-5% that will go into a private account.

GregMSmith · 03-29-2009, 07:20 AM

This thread seems to have died out quite some time ago but the current economic situation (I prefer not to use the word "crisis" which has been politicized) presents an interesting and perhaps useful context to continue consideration of the potential benefits and risks of modifying the current SS system. Unlike the tech market bubble crash of the late 1990's--which would have been a genuine personal "crisis" for anyone who had invested all of their retirement savings in that sector--the current downturn is extremely broad. Time will tell how long-lasting the stock market downturn will be but, if it lasts for a year or so, the theoretical impact it could have on a generation of workers about to retire would seem to be potentially significant. Now, perhaps that would be mitigated by resisting the urge to lock in losses by transferring retirement investments into bonds or another option perceived to be safer. I'm not an investment specialist (as my personal investment history would attest).

However, the risks to retirement investment in the private sector seem, to me, to be manageable if one adopts a broad investment strategy. In any market, there are always winners--the money goes somewhere, whether it's gold, commodities, municipal bonds, etc. It also seems clear to me that the SS system is economically and morally unsound at its core. As previously described by other writers, the numbers lead to an inevitable insolvency as the presumed eternal population pyramid straightens or inverts. The fact that the SS deduction has steadily increased from one percent in 1937 to a full 15% (of the first $106,000) now is a good indicator that it is a fundamentally unsound system (the employer's contribution must be included in any evaluation of the SS system).

Morally, a system euphemistically referred to as a "pay-as-you-go" system could, more honestly, be called a "steal-from-your-children" system since it obligates future generations to pay for current workers' retirement (none of the fungible dollars currently extracted from workers will exist when they retire). On a more personal level, the impact of a nearly universal mandatory system that takes a full 15% of one's salary with the promise of providing guarantee against insolvency in retirement also has the effect of reducing the feeling by individuals that they are responsible for their decisions throughout life--rather than the government. Increasing reliance on the "wisdom" of the bureaucrats in Washington is a very foolish and dangerous direction.

So, as a society, we are faced with a dilemma: do we stick with the belief that the current SS system that provides poverty level sustenance in return for a whopping 15% extracted from our salaries--or do we fashion a new approach that is more reliable than depending on the eternal largess of the political bosses in Washington (I suspect I'm giving some clues to my inclinations.) I generally believe that extremes, as interesting as they are to consider theoretically, are usually not good choices when considering public policy. We presently have a system on one extreme: full reliance on the government and a guarantee that one's 15% "investment" in retirement will not provide a truly comfortable quality of life in our declining years. I would not recommend that we abandon the current system in favor of the pre-1937 approach ("you're on your own, kids"), since there will always be a portion of any population that is unable to put sufficient money aside for their retirement.

I do believe that it is possible to craft a system that takes advantage of the tremendous returns in the private sector without completely abandoning the benefits of a government mandated system. One hugely successful example is the Federal Government's Thrift Savings Plan which provides investment options for individuals to select without permitting wild gambles (leveraged commodities investments, for example). One can choose from relatively aggressive (fortunately, not as aggressive as I was during the tech boom) to very conservative (government bonds). In any case, if one was to take the 15% already being extracted from one's payroll and invest it in even the most conservative TSP option, the resulting returns after a 30-year career would be far greater than SS would provide.

I can envision a SS replacement system that requires the same investment percentage but provides individuals with a reasonable range of options. It could be structured so that all investment options include a balance of investment types (mutual funds, bonds, money market). For those millions who a previous writer opined (probably correctly) would have no idea how to invest the funds, the limited range of choices would simplify matters--and high-risk options would not be included. For those who have the benefit of additional disposable income that can be invested, IRAs and 401k types of retirement options would continue to exist.

I see no downside since the only way the system would fail would be another major stock market crash. The current downturn pales in comparison and numerous controls were implemented over the years to make it nearly impossible for a repeat. In the event of a worst possible case scenario, the federal government could always re-institute a government handout program by sending the bills to our children and grand-children again.