This year, Social Security will celebrate its 70th birthday. My parents tell me this is the age you start to fall apart. All the excesses and abuses of your youth catch up to you, and you discover new aches and pains on a daily basis.
Social Security was born in 1935 under Franklin D. Roosevelt and his New Deal. The U.S. Postal Service registered workers for this new program, sending out 35 million cards. The first benefits were given out on an annual basis, one check per year, and the average check was around $58. In 1940, benefits began to be paid on a monthly basis, and we began to incorporate this money into our regular budget. Ida May Fuller of Ludlow, Vermont, received the first monthly check in the amount of $22.54.
Roosevelt said, “We can never insure 100% of the population against 100% of the hazards and vicissitudes of life.” The original intent of the program was to act as a buffer in the most dire of situations.
It wasn’t until 1950 that cost of living adjustments were added to benefits. Before, the benefit you received at retirement was the same one you received at the end of your life. Because of the gap between institution of the system and the first adjustment, the first COLA was 77%.
By 1961, early retirement was established at age 62 for those willing to take reduced benefits, and health insurance for those over 65 was added. Medicare was born. Up until this point, the benefits remained low. John F. Kennedy said of Social Security, “… it cannot remain static. Changes in our population, in our working habits, and in our standard of living require constant revision.” Forty years later, those words ring true.
At some point after this, presidents and ordinary citizens alike began to view Social Security as a promise and a right. Many used this as a primary source of income in their retirement. Meanwhile, the Supreme Court ruled that Social Security is not guaranteed, regardless of how much money you put into the system. According to the judges, this was a tax to be used at the government’s discretion.
Today, one in six Americans receive a benefit check from Social Security. It is a pay as you go system. That means the workers of today are paying in to cover benefits for today’s retirees. In 2000, it took 4.8 workers to support one beneficiary. By 2035, the ratio will be 2.7 to 1. Now, 75% of annual revenues go to pay current benefits. In 75 years, the outgo will exceed the income.
Factor in an ever-aging population, and you can see we are on a collision course. By 2030, 20% of the population will be between 66 and 84 years old. Add in increasing lifespans, and the problem gets stickier. It’s no wonder that the time has come for Congress to tackle this sacred cow.
President Bush is proposing a reform measure which will allow for privatization of a portion of the money we place into the system. Now, 6.2% is taken from your paycheck. Your employer matches this with another 6.2% for a total of 12.4%. Medicare takes 1.45% from both the employer and employee.
Privatization will allow you to carve out approximately one-third of this, up to $1,000, and put it into a private account in your name. That means you will have to choose the investments, monitor the funds, and make changes as necessary. For this portion, the risk is taken off Uncle Sam and put onto your shoulders.
But how does that help the aching system right now? It doesn’t. Privatization does not add one penny to the system. In fact, taking current revenue off the table to pay current benefits will cost, to the tune of $1 to $2 trillion (that’s with a T) over the next ten years. Bush plans to pay for this with borrowed money, but, like many American families, the federal government is nearing its credit limit. With a falling dollar and rising costs, this plan appears to fall short.
What the politicians don’t tell you is that real reform in Social Security cannot take place without two things happening. One is that benefits must be cut. This can happen by increasing the retirement age. Mine is already near 67 years old. It can happen by changing how your benefit is calculated. It can happen by changing how COLA is handed out. The Bush Administration hopes that private accounts will grow to the point that the government can lower payments in the future. It doesn’t matter what you call it. It all boils down to one thing… a cut in benefits.
A cut in future benefits will help, but it may not be enough. An increase in taxes could give the system a much-needed immediate shot in the arm. Increasing both the employer and employee portion by just 1% would allow our present system to remain intact until 2078. According to my calculations, I’ll be long gone by then.
So, how do you fix the system now and ensure its survival for our children and grandchildren? It must be a combination approach. Congress must go back to the original intent of Social Security. Scale back on benefits. Increase taxes to shore up the trust fund. Look at using private accounts at some point, maybe in another five years when the deficit is under control but use caution.
While I like the idea of private accounts, I’m not sure they’re for everyone. Allowing us to manage our own Social Security investments gives us ownership in this process, but it also puts the burden on the federal government to provide the much needed education to ensure we don’t mess it up. After all, if we blow it, who will pay?
The time has come to take the bitter pill for this very mature and very ill system. The question is do we make choices which only delay the inevitable or do we make the tough choices to keep the patient healthy?
America, it’s time to take your medicine.
Nancy Lottridge Anderson, CFA, is president of New Perspectives Inc. in Clinton. Her e-mail address is firstname.lastname@example.org, and she’s online at www.newper.com. Her column appears monthly in the Mississippi Business Journal.