Social Security
On August 14, 1935, in the midst of the Great Depression, the American people entered into a contract with our government in which we collectively bartered a percentage of our wages to pay for an insurance policy ensuring that none of us become destitute when we are no longer able to work.
We have kept our side of the bargain, and each time we receive our paychecks most of us see that 6.2 percent of our wages have been withheld and turned over to the Social Security Trust Fund. Our employer is required by law to match our contribution with another 6.2 percent. Thus, if not for Federal Insurance Contributions Act (FICA) taxes, we could receive an additional 12.4 percent in our salary. However, our employers might not be so generous in the absence of legal coercion, and we might not be so faithful in putting aside the increase for hard times.
It has been a good bargain, a win-win situation. For the oversight of our contributions, we only pay one-quarter of the amount paid by private pension funds to their money managers. Overall, more than 99 percent of our premiums go to benefits and less than 1 percent is spent on overhead.
Our Trust Funds have been wisely and conservatively invested in the interest-bearing obligations of federal government bonds (as required by law), which has benefited the overall operation of our government. While we may have missed out a little bit on the booming stock market of the 1990s, we also didn’t see our trust funds reduced or wiped out by the current economic meltdown.
Today, more than 90 percent of all employees and the self-employed are covered by Social Security, and one in seven Americans, or more than 44 million of us, are receiving a benefit. Most beneficiaries are receiving a return on their contributions that is far greater than they would have received if they had invested the same funds in the private financial markets.
Since benefits are primarily paid out of current contributions and since the population is aging, there is a predicted shortfall of $3.5 trillion at some distant point in the future. However, there is a present surplus, and there are sufficient assets to pay 100% of benefits until 2042. Even then, without any further increases, the Fund could pay more than 70% of benefits for many decades after that. Other estimates, including that of the Congressional Budget Office, allow for sufficient existing reserves to pay full benefits through 2052, and perhaps into the 2080s.
Should we increase our contributions to ensure the long-term solvency of the current Social Security system? Currently, because of the annual cap on contributions ($102,000 in 2008), lower- and middle-income workers pay a higher FICA tax rate (as a percentage of income) than those who earn more than the annual cap.
One way to balance the Trust Fund beyond 2042 (or 2052, or 2082) is to simply raise or eliminate the annual cap. Since only 83 percent of all wages paid are subject to social security taxes, elimination of the cap would increase annual social security revenues by almost 20 percent, or roughly $100 billion per year, more than enough to take care of any foreseeable future "shortfall."
Or, perhaps the law should be changed to establish the cap at the president’s salary, which is presently $400,000 per year. Shouldn’t we all share the burden to "save" Social Security?
Many of us will never have the sophistication, discipline, or excess capital to consistently make good investments in a personal portfolio. For most workers, the bargain we made with our government back in 1935 remains the best deal we can hope for when we retire or should we become disabled. We do not have to worry that our retirement or a serious accident will coincide with an economic recession when the stock market is in decline, or that we will outlive the value of our private investments.
Retirement
In addition to Social Security, other opportunities exist for interested U.S. workers who are willing to increase their retirement contributions and to take some additional risks, such as 401(k) plans and Investment Retirement Accounts (IRAs). However, there is another way to extend the "ownership" of personal retirement plans in a way that is beneficial to society and is even more secure for workers.
Imagine an alternative personal investment plan as a supplement to traditional Social Security, in which employees make additional tax-free contributions to personal accounts in a National Bond Fund that invests its assets in the obligations of local and state governments, rather than the federal government.
Employers could agree to match Bond Fund contributions as a job benefit; employees could take their accounts with them from job to job; workers could negotiate the level of each subsequent employer’s contribution; retirees could decide for themselves whether to invest their savings in a lifetime annuity at retirement; they could choose to spend their entire nest egg as they please, or they could leave it to their heirs.
The stability of investments in state and local bonds would require minimal management costs, increase the rate of returns, and would allow the principal placed in personal accounts (which could be withdrawn at any time to meet emergencies) to be guaranteed by the federal government just as it does for bank deposits.
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