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Updated June 2011  

What are the latest developments regarding Social Security?

The future of Social Security is presently associated with the broader concerns about the size of the U.S. budget. Americans increasingly believe that Social Security is either at or approaching a crisis mode.

In 2005, the Bush Administration attempted to use its political capital from the November 2004 election victory to launch a campaign to significantly change Social Security through privatization. Even though Republicans controled both houses, he faced an uphill battle to achieve significant reform. The powerful AARP organization vehemently protested the Administration's efforts. Little progress was made on the proposal and in the aftermath of the Administration's embarrassment in its response to Hurricane Katrina, the matter was abandoned.

Why is Social Security a major issue?

The major current questions concern the long term solvency of the Social Security fund and the desirability of "privatizing" Social Security.

With respect to solvency, there remains the concern with projections that the current structure cannot remain solvent into the middle of the 21st Century. These projections are based on the increased longevity of Americans and a decreasing birth rate which will significantly change the ratio between working Americans and retired Americans. In addition to these concerns, there is the reality that the U.S. government is presently borrowing from the fund in order to meet general fund obligations as the government is in a substantial deficit mode. There are economists who dispute the gloomy forecasts, pointing out that they do not sufficiently take into consideration greater immigration and sustained economic growth. The Presidential Commission on Social Security recommended adjusting the formula for cost of living increases to more accurately reflect inflation and to adjust the retirement age based on increases in life expectancy.

The privatization idea advocated by President Bush in the 2000 campaign resulted in a Presidential Commission which issued a report in December 2001. The commission recommended that younger workers be permitted invest some of their payroll taxes in the stock market. At first, the accounts would be managed by a government-appointed board that would tightly control the kinds of investments allowed. Eventually, the program might allow private-sector managers to handle investments and permit them to offer a broader array of mutual funds. Workers could change their investments once a year. The proposals would require new government spending and in some cases, workers retiring in 30 to 50 years would face cuts in annual benefits from 1 percent to nearly 33 percent. Current public opinion polls indicate both support and opposition to the privatization proposal.  (Click to see chart). The level of support diminishes when some of the risks are considered.

Opponents of privatization observe that fluctuations in the financial markets could jeopardize retirement security for those whose investments were unsuccessful. They also note that administering small accounts would consume a large fraction of revenues as would the marketing costs incurred by private funds as they compete for worker's accounts. Net returns on private accounts would be reduced by the costs of management fees, account administration, and marketing.

What is Social Security?

Social Security is a government program which provides benefits for American workers. As it has evolved for the past sixty years, it is actually three programs in one: a retirement plan, a life insurance policy that covers the family of every worker (equivalent to a $300,000 life insurance policy) and a disability insurance program (equivalent to a $200,000 disability insurance policy.)

Social Security benefits are protected from inflation and guaranteed for life. Social Security is distinct from welfare because it is available only to workers and their families and because it provides benefits which significantly exceed benefits available under welfare programs. But it is also distinct from privately purchased pensions or disability and life insurance in that the benefits are not entirely distributed in a manner which reflect contributions. Lower-income workers obtain a greater percentage of benefits when compared to their contributions than do middle and upper income wage earners.

More than 139 million workers pay 6.2 percent of their earnings, up a maximum of $80,400 in 2001, to fund Social Security. The self-employed contribute as both employer and employee - 12.4 percent. The majority of benefits are received by retired workers, but Social Security also provides benefits to children of workers, spouses of workers and to disabled workers. Nearly half of Americans depend on Social Security for a majority deal of their retirement income and over 20% rely on it for over 90%.  (Click to see chart) This dependency increases with age.

Over its entire 60-year history, Social Security has never had enough money to pay 75 years of benefits, simply because it is a pay-as-you-go program. In any year, most of the money coming in through payroll taxes is also paid out in benefits. Revenue not being used to pay Social Security benefits are invested in U.S. Treasury bonds and is thus used to finance other parts of the federal budget. In 1998, interest earnings on the $750 billion Social Security surplus were $49.3 billion.

How do other countries handle Social Security?

All seven major industrialized nations have social security systems that provide old-age, survivorship, and disability benefits. Each of these systems is also funded on a pay-as-you-go basis; the United States and Japan accumulate some reserves for future use. Payments to current beneficiaries are financed through payroll taxes on current workers and employers. A few countries, such as Japan and Germany, use general tax revenues in addition to payroll tax collections to finance social security benefits. The level of public pension spending varies across the seven major industrialized countries. The United States spends about 6.9 percent of GDP on Social Security. Other countries, including Germany, France, and Italy, spend more than 10 percent of their GDP on public pensions. These countries also have roughly proportionate tax rates to finance their public pension programs. All these countries are also facing the prospect of having fewer workers to support their systems in future decades.

Is Social Security really in trouble?

As the "baby boomers" begin to retire, there will be gradually fewer workers and more retirees. This is basically a result of the greater longevity of seniors and of a declining birth rate. Under current projections, Social Security will continue through 2014 to take in more revenue than is needed to pay benefits. Beginning in 2015, incoming revenue combined with interest earnings can finance promised benefits through 2023. In 2024 the principal will have to be tapped. By 2037 the principal will be exhausted, but incoming revenue would still cover nearly three-fourths of current law benefits. Three major factors could improve these adverse projections: 1) the growth of the economy; 2) improvements in worker productivity and 3) modifications in U.S. immigration policies. On the other hand, should medical advances in the near future significantly extend life expectancy, the forecast could even be worse.

What are the proposed Social Security reforms?

There have been many proposed reforms of the Social Security system that would rectify the projected shortfall.

Many of these proposals involve suggested adjustments to the current structure of the program. The major proposals include:

    • Increasing the retirement age and indexing it to current longevity standards. Already the retirement age is scheduled to increase to age 66 for those born after 1943 and to 67 for those born after 1959.
    • Increasing Social Security taxes by raising the $80,400 income limit (currently $80,000) or eliminating the limit entirely. The separate Medicare tax limit has been already raised to $125,000.
    • Changing the formula for computing Social Security benefits.
    • Reducing the amount of guaranteed benefits.
    • Mandating Social Security coverage and participation to 3.7 million state and local government employees who are currently excluded from the program.

All of these proposals would be difficult to achieve. Opinion polls show that the only option supported by Americans would be raising the the Social Security taxes on upper income earners.    But this type of progressive taxation has little appeal to virtually all Republican politicians and a sizeable number of Democratic politicians.

Other proposals involve a fundamental change to the structure of Social Security program itself. These proposals include converting the Social Security program to a "means tested" program thereby excluding higher income wage earners. The Medicare reforms passed by Congress in November 2003 begin to implement this concept. The drug benefit is much greater for lower income Americans and there is a significant reduction in "Part B" Medicare coverage for higher income retirees.

Social Security Links

Google Directory - Social Security Issues 

Google Directory - Social Security 

Wikipedia - Social Security Debate 

Wikipedia - Social Security 

Social Security Administration 

AARP Social Security Page 

Brookings on Social Security 

Century Foundation: Social Security Network 

CATO Institute: Social Security 

Heritage Foundation: Social Security 

Senior Journal-Social Security Reform

How Stuff Works - Social Security 


Social Security Charts
(click to enlarge)

Public Opinion on Social Security Solvency

Past and Prospective Ratio of Workers to Recipients

Public Opinion on Partially Privatizing Social Security

Public Opinion After Detailed Explanation of Privatization

Distribution of Social Security Recipients, 2009

Degree of Reliance on Social Security for Retirement Income

Effect of Age on Social Security Reliance

Public Opinion on Solving Social Security