View/Review: Social Security

When discussing personal financial planning and retirement, it’s impossible to ignore the Social Security debate currently brewing in our country. Is there a crisis? Will privatization solve it? The White House is convinced the answer is yes. But would it be too risky and exclusive for all Americans? Can Social Security be strengthened and secured in its current form? United States Secretary of the Treasury John W. Snow and AARP President Marie F. Smith sound off on their stances.

Secretary Snow on Social Security

August 14 marked the 70th anniversary of the creation of Social Security, one of the great successes of 20th-century American government, and there’s never been a more important time to plan for a future that builds on the program’s history of success so that it will be there for our children and grandchildren.

When members of Congress went back to Washington, D.C., in September, they returned to a full plate of important issues, from the Supreme Court nomination to the war on violent extremism. But these immediate issues are only part of the job; a government that does not also plan for the future of its citizens is not a responsible one. The president has made protecting and preserving the promise of Social Security a high priority. Reforming Social Security for our children and grandchildren must stay at the top of the 2005 legislative agenda. Their future is simply too important to let partisan politics stand in the way.

Since President Franklin D. Roosevelt founded the program in 1935, Social Security has reduced poverty among the elderly and provided retirement security to millions of American families. This is a proud legacy.

But most importantly, we must look forward. Today, President Bush has called on Congress to strengthen and modernize the program. In its current form, the program cannot deliver on its promises to younger generations. Since current retirees’ benefits are paid by those who are still working (a “pay-as-you-go” system), our demographics can make or break the Social Security budget. For many decades, demographics underpinning the system were sustainable with many more people paying into the Social Security fund for every retiree. Today, as people live longer (drawing more benefits than ever before) and have fewer children (fewer workers to pay into the system), the program faces a precarious financial future. It used to be that 16 workers paid taxes to support one retiree, but that ratio has dropped to nearly 3-to-1 today and will be 2-to-1 by the time today’s young workers retire. By 2017, Social Security will be paying out more in benefits than it takes in. By 2041 – when younger workers begin to retire – the system will be bankrupt.

Perhaps worst of all, extra dollars that are collected by Social Security while it has been solvent — the Social Security “surplus” that you’ve heard about — are spent on other government programs, not saved for future beneficiaries of Social Security!

The government can protect those surplus dollars, and make smart changes to the program that will give Social Security a future that lives up to its name: secure.

Allowing workers to put some of their Social Security taxes into personal accounts would be the ultimate “lock box” for that money. It would have his or her name on it; the government would no longer be able to take that money and spend it on other programs.

These optional personal accounts would give working Americans the opportunity to build a secure nest egg of retirement savings that they own. For millions of Americans who never before had the opportunity to save or invest, this would be a great financial milestone on the road to a secure retirement. Personal accounts would mean that our children and grandchildren would have ownership and control over their hard-earned retirement dollars — a luxury that we simply don’t have under the current Social Security system.

Another proposed change to the program that the president has embraced, called progressive benefit growth, would address Social Security’s budget and solvency problems. It would allow all future retirees to receive larger benefit checks than similar retirees receive today, even after inflation. However, these benefits would grow at a rate that won’t break the Social Security budget. Lower- and middle-income workers would receive the largest growth in benefits, while those earning the most would see their benefits grow more slowly. This would go a long way toward solving Social Security’s funding problem and closing the hole in the safety net.

As we the people mark our 70-year relationship with Social Security, let’s make sure we raise our glass to a stronger future as we appreciate a historic past. Our children and grandchildren deserve a modernized system; Congress should give it to them as an anniversary gift.
Smith on Strengthening and Securing Social Security

In these days of heightened insecurity, the last thing Americans deserve is a threat to their own future financial security – and a threat to one of the most successful programs in U.S. history. Yet as we stand here today, Social Security stands in the line of fire. There is a lot of misinformation being shot out of Washington. The first thing we need to know is that – despite everything we may have heard – Social Security today is strong. The program is not in crisis. It’s not going broke. The trust fund will be large enough to pay 100 percent of promised benefits through 2042 – when the youngest of the baby boomers will be 78 years of age. After 2042, if no changes are made, fully 70 percent of promised benefits could still be paid.

So, what we need to do now is to take steps to strengthen Social Security’s long-term solvency to ensure that full benefits can be paid beyond 2042. We want to guarantee full Social Security benefits for all future generations. But there is a right way and a wrong way.

The wrong way is to take some of the hard-earned money workers pay into Social Security and divert it into private accounts. AARP is firmly opposed to private accounts that divert money from Social Security payroll obligations. Such private accounts won’t help Social Security’s long-term financial Security and they won’t help the future retirement security of today’s younger workers.

Why? Because benefits to current beneficiaries still must be paid, even though there would be less revenue due to the diversion of payroll taxes into private accounts. So, extensive national borrowing would be required to meet these obligations, resulting in higher interest rates and additional interest payments. On top of that, the borrowing to fund an extended transition period would equal as much as $2 trillion over 10 years. At a time when deficit figures are already at record numbers, it makes no sense.

And let’s not forget – private accounts can lose money just as fast as they can make it. Those of us who’ve watched the stock market in the last few years know that “what goes up can certainly come down.” What if you needed to retire when the market was down and your private account was down with it? Do we really want to take that gamble?

Social Security is the only guaranteed, inflation-proof, lifelong benefit that millions of workers – present and future – can count on. We should not be talking about replacing this rock solid guarantee with a risky gamble.

AARP believes there are better ways to ensure Social Security’s long-term solvency and we will wage the fight of our lives to ensure that the only guaranteed source of retirement security for America’s families is not put at risk needlessly.

I believe that our Social Security promise embodies our deepest values as Americans – our obligations to one another – our obligations between generations – between parents and children – between grandparents and grandchildren – between those in retirement and those at work – between the able-bodied and the disabled. The promise of Social Security has endured for 70 years and I don’t believe we should be putting an expiration date on it now.

Today, there are four pillars to retirement security – but only one that is guaranteed – Social Security. The others pillars are: pensions and savings; continued earnings; and health insurance. And, the fact is: the guaranteed benefits of today’s Social Security program will be even more important to the baby boomers and to those who follow them – than they are for today’s retirees!

Less than half of today’s working Americans have a pension plan where they work. Personal savings are at an all-time low. The average older American already spends nearly a third of his or her income on health care. And although many older Americans are having to work longer, age discrimination and a weak job market limit what they can earn.

Social Security today supplies nearly half of the income for many older Americans. The percentages are even higher for minority populations. And for one out of every three beneficiaries, especially older women, Social Security is all that stands between them and living in poverty.

Once we put aside the nonstarter of taking money out of Social Security to fund private accounts, we need to have an honest debate about the serious options available to us. Here are just two examples of options we should explore:

One option would be to increase the wage base for Social Security contributions. Currently, the maximum wage subject to Social Security payments is $90,000. Raising that cap to $140,000 (phased-in over 10 years) would lower Social Security’s projected long-term shortfall by 43 percent. This would be fair because higher wage earners have recently benefited from substantial tax cuts and other subsidies for their investment and retirement accounts.

Another option would be to diversify Social Security’s Trust Fund investments to increase the likelihood of higher returns. Today, the Trust Fund can only be invested in special Treasury bonds, similar to the Treasury certificates of deposit that you or I can buy. These are safe investments, but they have a modest rate of return – currently about 4.4 percent.

So, taken together, just those two steps would lower Social Security’s long-term shortfall by well over half – 58 percent – and that is just for starters. There are other options – options that fall far short of gambling with risky private accounts – that could strengthen the program even more.

Let me be clear: AARP is not against private savings and investment accounts when they’re funded by you and, hopefully, your employer. Such private accounts are an excellent savings tool, but in addition to Social Security, not in place of Social Security.

It is extremely important that our children and grandchildren begin now setting money aside to invest and save for their retirement. Knowing they can count on Social Security’s guaranteed benefits, they can make their investment choices with greater peace of mind. But, under no circumstances should we weaken Social Security by taking money from it to create private accounts.

And, let me be clear about something else. AARP’s opposition to private accounts funded by Social Security is not a liberal position, or a conservative position, or a Republican position, or a Democrat position – it’s a common-sense position that can and should be supported by people of all political persuasions and ideologies who care about the future retirement security of our children and grandchildren.

Baylor Business Review, Fall 2005

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