Make us your home page
Instagram

Today’s top headlines delivered to you daily.

(View our Privacy Policy)

Social Security's future

An often-repeated assertion in the debt-ceiling negotiations was that entitlement programs, including Social Security, must be cut if the long-run deficits are to be reduced. This raises many questions among those who have contributed to the program all their working lives and who have long expected an unquestioned return on that investment. They resent being told that they are living at the expense of the taxpayer like some welfare recipient receiving an "entitlement."

Isn't Social Security a separate program? After all, it has its own revenue source — the payroll tax — and its own spending formula based upon total taxes paid during the recipient's work life. Why is Social Security on the chopping block as if it were just another program in the federal budget? If it is separate from the rest of the budget, how can cuts in Social Security help reduce the deficit? What's the connection?

Although not a perfect analogy to private insurance, Social Security is an insurance program that takes in premiums and pays out benefits that insure beneficiaries against an unwanted event: poverty in old age. Of course, unlike the premium on a private insurance policy, the payroll tax is involuntary; participation in Social Security is required of most workers and the "premium" is the payroll tax. This mandate restricts freedom, of course, but the resulting universal coverage greatly reduces the program's administrative costs, and it forces the profligate to save.

For most beneficiaries, Social Security is an important component to retirement financing, and for 35 percent of the recipients, Social Security checks are their sole retirement income. Consequently this insurance program is extremely popular with the electorate. Given this popularity and the existence of a separate financing formula, why is Social Security part of the negotiations to bring greater balance to the federal budget?

In part, it is ideology. Apparently, to those who favor a reduction in the size of government regardless of how that is accomplished, anything that is expensive and operated by the federal government is fair game. They strongly believe in the supremacy of the private sector in providing all but a few services such as national defense. For these people, it does not matter that Social Security has much lower administrative costs than its private sector counterparts. Even when it is shown that Social Security has other advantages, such as the progressive benefit scheme — in which higher income payroll taxpayers cross-subsidize the lower income payroll tax-payers — still its opponents prefer to cut the program.

Would such cuts save money? Social Security was designed as a "pay-as-you-go" system in which current workers pay for current retirees in the expectation that when they retire, future workers will pay for them. As such, each generation invests in the next generation in a spirit of reciprocal responsibility to one another. This is not a one-way transfer from young to old; each generation inherits the physical and knowledge capital from the preceding generation. This worked fine for 75 years. Until the baby boom.

When the system was established in 1935, there was no way to forecast the baby boom that would follow the end of World War II. But in 1983 the Reagan administration did the math. They calculated that within a few decades a large number of boomers would retire and the payroll tax as then scheduled would be an insufficient source of revenue to pay the scheduled retirement benefits.

As a result, the plan put in place by President Ronald Reagan included an increase in payroll tax rates, creating a surplus of cash which enabled Social Security to buy special U.S. Treasury bonds. These bonds would be held in reserve, that is, in the "Trust Fund," representing an obligation of the nation as a whole to the Social Security System.

This reserve was to build to over $2.2 trillion worth of bonds. When needed, these bonds would be sold back to the Treasury by Social Security in exchange for cash to supplement the payroll taxes to pay the retirees their checks on schedule. The bond fund was the safest investment the boomers could make because it is backed by the full faith and credit of the nation itself. Reagan's economists estimated that the bond sales, or "redemptions," would begin to be required about 2018.

Due to the severe recession in 2008-09, the payroll tax revenue became insufficient eight years earlier than planned; the system ran deficits in 2010 and 2011 and consequently had to start redeeming the bonds. Where did the Treasury get the cash to redeem these bonds? Answer: the same place the Treasury gets any of its money — taxes and borrowing. So it is through the bond redemption part of the Reagan plan that Social Security impacts on the federal budget today.

Only by slowing down the rate at which the bonds are being redeemed can changes in Social Security help reduce the federal deficit. The slower the bond redemptions, the slower the annual amount of cash the Treasury must pay to redeem the bonds. This reduction in the rate of bond redemptions can be achieved either by increasing the payroll tax rate (shifting the burden of bond redemptions from the nation as a whole to the current generation of workers) or by raising the eligibility age for full benefits and/or by employing a less generous inflation adjustment formula. All these options are political minefields.

Charles O. Kroncke is associate dean in the University of South Florida College of Business. William L. Holahan chairs the department of economics at the University of Wisconsin-Milwaukee.

Social Security's future 08/29/11 [Last modified: Monday, August 29, 2011 10:18am]
Photo reprints | Article reprints

© 2017 Tampa Bay Times

    

Join the discussion: Click to view comments, add yours

Loading...
  1. Dade City's Wild Things blocks PETA officials at gates for court-ordered site inspection

    Wildlife

    Times Staff Writer

    DADE CITY — Dade City's Wild Things founder Kathy Stearns refused to let People for the Ethical Treatment of Animals officials enter her facility on Thursday for a court-ordered inspection, court filings show.

    Dade City's Wild Things founder Kathy Stearns refused to let People for the Ethical Treatment of Animals officials enter her facility on Thursday for a court-ordered inspection, court filings show. This comes four days after 19 Wild Things tigers arrived at the Greater Wynnewood Exotic Animal Park in Oklahoma. A judge had granted an emergency injunction July 14, ordering Stearns not remove any tigers pending the upcoming PETA inspection. Photo from Facebook page of the Greater Wynnewood Exotic Animal Park in Oklahoma.
  2. St. Petersburg City Council approves $326 million sewage fix

    Blogs

    ST. PETERSBURG — Last week the City Council learned no criminal charges would result from the up to 200 million gallons of sewage St. Petersburg's sewer system released from …

    [LARA CERRI  |  Times]
  3. Pasco commuters watch out: Broken water main restricts State Road 52

    Public Safety

    NEW PORT RICHEY — A water main break has caused a portion of State Road 52 — one of the busiest roads in Pasco County — to buckle on Thursday afternoon, reducing three lanes of westbound traffic to just one.

  4. Man taken into custody after live streaming drive along Clearwater Beach sand

    Public Safety

    CLEARWATER — Clearwater Police took a man into custody Thursday afternoon after, they said, he drove his car over beach chairs and umbrellas along Clearwater Beach and streamed it on Facebook.

    Clearwater Police took a suspect into custody Thursday afternoon after he drove along Clearwater Beach to Caladesi Island, running over beach chairs and umbrellas. [Courtesy of Clearwater Police]
  5. Once trapped and wounded, manatee and calf return to the wild

    Wildlife

    NEW PORT RICHEY — The small crowd readied cameras and craned their necks, peering over heads and through bodies to try and catch a glimpse. Brittany Pharel, 10, wanted to see the hulking manatees, a mother and her calf, laid out on blue tarps Thursday along the edge of the Pithlachascotee River.

    Tampa's Lowry Park Zoo's associate veterinarian Lauren Smith, 33, examines the heart rate of a manatee calf named Cottee just before it was released into the waters of the Pithlachascotee River on Thursday. 
Cottee's mother Pascow was released at the same time in New Port Richey. 
The pair became stranded in May and the mother was found wounded. They needed to be rehabilitated before they could be released into open waters. [ALESSANDRA DA PRA  |   Times]