Financial constraints indicate that Social Security (SS) has a precarious future. Ignored is that Social Security 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. 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, predicted for 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 emptied. Where is this fund? It is only in a ledger as a government debt to Social Security. Because Social Security cannot borrow and cannot receive funds from the general revenue, not using its Trust Fund will force SS to either increase the FICA tax or reduce benefits in order 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 remained low, but forecasts indicate a reversal, already signaled by a 5.9 percent increase in SS benefits for 2022.
Overlooked situations
Social Security income is insufficient to meet the daily needs of all 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 have complicated the use of fixed income for daily needs and exit of the ‘baby boomers’ from the workforce has increased demand for the fixed income securities, which has driven up their price, and driven 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 an uncertainty, 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, the 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 it would be forced to borrow from other sources. 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 only continually raise asset prices, then another large amount of purchasing power will be diverted from the economy. Pension fund purchases of government securities release the investments to the economy. In effect, savings for future retirement guarantees future 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 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 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 has capability to provide pensions for retirees that give them security, stability and added advantages. Security results from the strength of the government system. Stability results from the 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 in order 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 distribution of payments to retirees is well accepted. Continuing those distributions and refining them as economic changes occur are 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 costs that are necessary 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 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 purchase of American goods, moves money and resources out of the country.
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 SS 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.