Saving Social Security

A National Pension Plan

Financial constraints indicate that Social Security (SS) has a precarious future; its history shows built-in failures that cannot be constantly repaired. Only a National Pension Plan can provide a suitable and secure financial arrangement for retirees. Fortunately, SS already has the framework for a National Pension Plan.

Social Security's Built-in-Failures
The reason for the potential social security dilemma is well known; revenue will be insufficient to meet the benefits for an increased senior population. From the day of its first payment, check number 00-000-001, issued to Ida May Fuller in the amount of $22.54, dated January 31, 1940, Social Security obligated itself to pay benefits that were sure to eventually exceed the FICA contributions. Despite payroll taxes (FICA) being greatly increased in 1983 to assure Social Security operated in the black, payroll taxes have slowly become insufficient to meet demands. An increase in life expectancy and constant cost-of-living adjustments have strained the payments. Retirements of the "baby boomers," those born between 1946-1964, which began in 2011, coupled with a reduced birth rate, have greatly decreased the ratio of workers to retirees. This reduction directly translates into a reduction of the FICA tax revenue available for SS benefits.

After SS is in the red, with payments exceeding income, which is predicted to happen in 2035, it is expected to use funds from the nebulous Old-Age and Survivors Insurance (OASI) Trust Fund, a fund that captured the FICA taxes that exceeded previous payments. Calculations indicate that SS will be able to use the OASI fund until the third or fourth decade of the 21st century, after which the fund will be empty. Where is this fund? It is in a ledger as a government debt to Social Security. Because Social Security cannot borrow and receive funds from the general revenue, not using its Trust Fund will force SS to either increase the FICA tax or reduce benefits to remain solvent and meet its obligations.

A chilling scenario awaits a nation with an aging population, a reduced birth rate, and decreasing FICA contributions. Inflation, which plays havoc with the fixed-income population, has already provoked a 5.9 percent increase in SS benefits for 2022.

Overlooked situations
Social Security income is insufficient to meet the daily needs of the population. Those who do not have additional pensions but have accumulated savings must either directly use investments for expenditures or transfer equity investments to fixed-income investments and, hopefully, live from fixed-income interest. Unusually low-interest rates in the past decade complicated the use of fixed income for daily needs. The exit of the 'baby boomers' from the workforce increased demand for the fixed income securities, drove up their prices, and drove down their yields. Selling investments requires purchase of the securities by others. Here again, employed workers subsidize retiree finances; they purchase the securities.

With corporations deserting their original pension commitments and the U.S. government's Pension Guaranty Corporation rescuing the insured, with the stock market always uncertain, and investment constantly seeking a safe haven in U.S. government bonds, it is obvious that America's citizens are depending upon their government for an assured retirement income.

On paper, SS is being financed by FICA rather than by the general revenue fund. However, to workers, the FICA payment is only another form of taxation, and the result is the same as if they paid FICA to general revenue. In effect, Social Security Retirement exists only on paper and not in practice. If the fund contained locked FICA deposits, the government would not have access to it and would be forced to borrow from other sources and the money supply would be continually decreased by the amount of the locked funds. The government must use the fund for its expenditures.

A similar analysis applies to pension plan investments. If wages are diverted to investments that churn in the markets and continually raise asset prices, then another large amount of purchasing power will be diverted from the economy. Pension fund purchases of government securities subsidize government spending and release the investments to the economy. In effect, pension plan savings for future retirement guarantees the government will maintain deficit spending.

Proposals for keeping the retirement system solvent continually circulate without decision. A lack of discussion exists on what may be the most critical failure of the Social Security retirement plan - it operates as a pay-as-you-go plan rather than as a true retirement plan. Changing its stature from pay-as-you-go to a true retirement plan might establish a social security system that is competitive with an annuity of a private industry plan and yield advantages that private industry plans cannot provide. Moving money from one accounting line (Social Security Fund) to another (general revenue), while maintaining the same result, resonates as a sleight-of-hand operation. It is a 'smoothie,' but the benefit of the change is that Social Security will become a true retirement plan, actuarially and financially.

Can Privatization Resolve the SS Problems?
The Social Security retirement fund, better known as OASI-Old Age and Survivor's Insurance, must be viewed in its entirety and not solely by its retirement fund. About 69% of the entire payroll payments are directed to the retirement fund. Medicare Insurance gets 19% and disability insurance gets 12% of the payments. Only 1% is charged for administrative costs. Social Security contains opportunities and flexibility in providing all types of insurance coverage for the aged that a private system cannot conveniently cover.

Many factors make privatization an incomplete solution. Periodic falls in the stock market and a decade of low-interest rates demonstrated the uncertainties and investment risks inherent in a privatization plan. The issue of how to translate the present system to a partial investment system, while still supporting retirees from all the FICA taxes in the present system, has not been resolved. Allied to this significant drawback to privatization is another similar drawback ─ it affects those who most benefit from the Social Security system ─ wage earners who work at low wages and live on the margin. These persons cannot take risks with a privatization scheme that might fail and not be able to provide them with the minimum funds to live in their retirement. Those who can risk some of their contributions are those who have the earnings capacity to invest some of their income in securities. Because the Social Security system doesn't have retirees receiving benefits in direct proportion to their contributions and has the higher earners subsidizing the benefits of the lower earners, sidetracking some of the FICA taxes to a private plan will reduce funds for the low-wage retirees. FICA taxes will have to be increased to provide the shortfall; the fault which privatization claims it will prevent.

Retirement income will be derived from selling investments. Who will purchase the investments, those who are making contributions to their SS plan? These are the same people who pay the FICA today to support the retired SS earners. Social Security will remain a pay-as-you-go plan.

Can Social Security Function as a Pension Plan?
Presently, worker payroll taxes support retiree income rather than the support coming from general revenue. Social Security determines the formula that shifts a portion of wage earners to retiree income. Rather than a "pay-as-you-go" system, SS has become an income distribution system, shifting a portion of the income from wage earners to those who don't earn income. This shifted income is usually spent quickly and recirculates in the economic system. No matter how it is sliced, diced, or construed, the present SS system is almost a National Pension Plan ─ the government raises funds by taxes (payroll) and uses these taxes to give retirees a fixed income. The system only needs improvements; a more just retirement income for everyone, and a certainty that the funds will always be available.

Modified to be a national pension plan, Social Security can provide pensions for retirees that give them security, stability, and added advantages. Security results from the strength of the government system. Stability results from guaranteed income. One added advantage is that government control allows quick adjustment of retirement benefits according to family status, cost of living, and total income.

A modified framework for the Social Security system uses the forecasted expenditure for Social Security as a budget item in a unified budget with tax revenue supporting the budget item termed Social Security Benefits. The individual's W-2 tax form would become an accounting entry for determining future benefits.

Placing SS benefits in a unified budget and making certain that the budget item is financed from general tax revenue has several other advantages:

• The present payroll taxes are regressive and unfairly affect lower incomes. Income taxes are progressive.

• The Social Security budget is mandatory. If it must be increased, then other budget items can be decreased to maintain taxes at the same level.

• Taxpayers will not complain if more taxes are diverted to social security taxes as long as their total tax bill remains constant.

• Because Social Security is a major portion of the Federal budget, other budget items will be forced to compete with it and will have greater scrutiny. Wasteful and unnecessary budget items will be "under fire."

As of now, the distributions of payments to retirees are well accepted. Continuing those distributions and refining them as economic changes occur is a matter of priority, and assuredly, Social Security should have elevated priority. After all, Social Security payments are only a transfer of payments from children and grandchildren to their elders ─ a family affair. Instead of family wage earners directly supporting their parents, these same wage earners will be, as now, indirectly supporting them. In other words, no matter the costs involved, as long as they are reliable and sensible, the public will be prepared to pay the necessary costs to sustain their elders.

The costs of the retirement program have a greater return than other government programs. As mentioned previously, payments are instantly recirculated in the economy and assist in moving the economy forward. Defense programs often result in the production of weapons that don't benefit the economic structure and are soon discarded. Many government programs are wasteful and useless to the American community. Foreign aid, which does not require the purchase of American goods, moves money and resources out of the country.

Medicare
A national pension plan and a national health insurance plan complement but are not dependent on each other. The former can be managed from the general fund and the latter can remain as Medicare and be financed by the 1.45 percent employer and employee rates.

Securing the National Pension Plan
The present Social Security Retirement System cannot be easily fixed and its built-in failures cannot be patched. Why continue with that system when a National Pension Plan tends to make Social Security more relevant, more simple, and more equitable? By making Social Security a budget item, its solvency is resolved. Rather than treating Social Security as an adjunct to America's economy, it is preferable to integrate the needs of the retirement community into the needs of the entire society. In a responsible society, resources are shared and so are sacrifices.