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Simplifying Social Security Proposals

Common Sense Says No to Privatization

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A woman stands outside the Social Security Administration office February 2, 2005 in San Francisco, California.
Justin Sullivan/Getty Images News/Getty Images
The war of words over President Bush's ideas to "reform" Social Security filled the airwaves, newspapers and cyberspace in 2005 and 2006. Americans struggled to separate fact from fiction as politicians, economists, lobbyists and interest groups all weigh in with their version of the "truth" Social Security.

I pulled on my boots, and waded through the Social Security swamp of rhetoric hype and political mud on a search for the hard facts. The following information is presented in simplified form, so that we can all finally understand the issues.

(Also see The 2008 Democratic Candidates on Social Security Issues.)

Fact - Social Security is entirely solvent and will pay full benefits at least through 2042. The nonpartisan Congressional Budget Office projects that Social Security can pay all benefits through 2052 with no changes whatsoever.

Fact - The Social Security trust fund has accumulated a surplus of more than $1.5 trillion. That occurred because the fund collected more in payroll taxes from our paychecks than it paid out in benefit checks.

Fact - 48 million Americans now receive monthly Social Security checks. Of those, 38% are the disabled, and widows and their children. The remainder are retirees. More than 5 million children receive part of their family income from Social Security.

Fact - The current US Social Security program is a model of financial efficiency both for the government and for banks and businesses, in that 99% of all payroll taxes paid into the trust fund are paid out as benefits. Administrative overhead to run the program is only 1% of all monies paid in by us.

Fact - In 2018 at earliest, monthly benefit checks sent out will be higher than the monthly payroll taxes collected by the Social Security trust fund. However, the surplus will keep growing until 2028 because of the interest that the Social Security trust fund earns in US Treasury Bonds.

Fact - If nothing at all is done to “reform” social security, it will still be able to pay 70% of full benefits after 2042, at worst case.

Fact - In 75 years at the earliest, if nothing at all is done to reform Social Security, it could run a deficit of up to $3.7 trillion. Not $10 trillion.

Fact - Payroll taxes (called FICA) are now withheld from US workers' paychecks on the first $97,000 of their annual incomes. That means that if a person earns $400,000 a year, he pays exactly the same FICA as the person who earns $97,000 a year. (This is called a payroll tax cap, because it's capped at $97,000.)

Fact - If the payroll tax cap was raised to $200,000 per year, there would be NO Social Security funding gap for more than 100 years.

Fact - When President Bush states that he will not raise taxes to "reform" Social Security, that means he will not ask the wealthy to pay more because he refuses to raise the payroll tax cap.

Fact - President Bush proposes that Americans be allowed to invest part of their payroll taxes into private saving accounts that would be invested in stocks. These accounts are like 401(K) accounts. This is called "privatization."

Fact - By diverting payroll taxes away from being paid to the Social Security trust fund, Social Security would no longer be able to pay full benefits. Benefit cuts would range from about 15% to 46%. Most economists project that diverting payroll taxes way from the trust fund will result in the phasing out altogether of Social Security.

Fact - President Bush said in 2005 the initial cost to American taxpayers for privatizing Social Security will be $2 trillion!!!

Fact - Privatized accounts will be reduced as much as 20% to 30% by fees charged by investment bankers, trustees and account administrators. This occurred in Great Britain, Chile and other countries that adopted privatization. In both Great Britain and Chile, privatizing Social Security has been judged a failure because retirees' benefits were greatly decreased by "fees."

Fact - The Security Industry Assn wrote in a 2005 research paper that its member firms will collect at least $39 billion in fees over 75 years from privatized accounts. This $39 billion will be taken directly out of retirees' retirement funds.

Fact - The President’s privatization proposals are not intended to and are unable to "fix" any shortages in the Social Security trust fund.

The real truth is that conservatives have historically detested and attempted to undermine Social Security since Franklin Roosevelt established it in the dark days of the Depression. Conservatives derided it then, and they do now, as an entitlement, akin to welfare. They forget that Americans PAY for their benefits.

Final Fact - Most Americans believe that Social Security should NOT be privatized. There are many excellent, modest proposals to shore up Social Security long-term, that involve raising payroll taxes and/or making very minor benefits cuts decades from now. (And those proposals don't cost $2 trillion.)

Until then, most Americans see no reason to "reform" a reliable, trustworthy system that's not broken.

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