2008 Woodie Awards
Social Security
Whose Money Is It Anyway?
Oren Litwin
Issue date: 3/8/05 Section: Opinion
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"In 1960, the Supreme Court of the United States in Flemming v. Nestor ruled that you have no legal right to your Social Security benefits...and that your benefits are part of a government spending program, no different in the eyes of the law than corporate welfare or farm subsidies." Patrick Hynes, Cato Institute.
Right now, the main event in Capitol Hill is the wrangling and arm twisting by President Bush to gather Congressional support for his Social Security reform plan, and by Democrats to defeat it. It is shaping up to be the most apocalyptic legislative battles in recent memory. But why? What makes Social Security reform so important? And why does it need reform to begin with?
Let us begin by briefly describing the present system. When you pay income taxes, 12.4% of the portion of your income below a cap (currently at $90,000, and indexed to inflation) goes into the Social Security trust fund. In other words, the most money an individual can currently pay into the fund is about $11,600 per year. From this fund are paid out disability payments and old-age pensions; the average beneficiary receives about $11,000 per year. The trust fund presently takes in more money than it pays out; and the remainder is exchanged for special Treasury notes. The Federal government then uses the excess money to fund general spending, which lets it pad its budget figures and disguise the true state of its finances. (If you tried this in a private firm, you would probably be arrested.)
The problem is that the system depends on a large number of workers to cover the cost of the retirees. And not only are birth rates going down, but life expectancy is going up. So while in 1950 each beneficiary was supported by 16 workers, in 2003 there were only 3.3 workers per beneficiary. In 2030, there will only be 2.2 workers per beneficiary. And the number will continue to decrease.
Moreover, the payment formulas are indexed not to the rate of inflation, but to wage growth. Because of this, benefits are growing more quickly than the general economy.
Right now, the main event in Capitol Hill is the wrangling and arm twisting by President Bush to gather Congressional support for his Social Security reform plan, and by Democrats to defeat it. It is shaping up to be the most apocalyptic legislative battles in recent memory. But why? What makes Social Security reform so important? And why does it need reform to begin with?
Let us begin by briefly describing the present system. When you pay income taxes, 12.4% of the portion of your income below a cap (currently at $90,000, and indexed to inflation) goes into the Social Security trust fund. In other words, the most money an individual can currently pay into the fund is about $11,600 per year. From this fund are paid out disability payments and old-age pensions; the average beneficiary receives about $11,000 per year. The trust fund presently takes in more money than it pays out; and the remainder is exchanged for special Treasury notes. The Federal government then uses the excess money to fund general spending, which lets it pad its budget figures and disguise the true state of its finances. (If you tried this in a private firm, you would probably be arrested.)
The problem is that the system depends on a large number of workers to cover the cost of the retirees. And not only are birth rates going down, but life expectancy is going up. So while in 1950 each beneficiary was supported by 16 workers, in 2003 there were only 3.3 workers per beneficiary. In 2030, there will only be 2.2 workers per beneficiary. And the number will continue to decrease.
Moreover, the payment formulas are indexed not to the rate of inflation, but to wage growth. Because of this, benefits are growing more quickly than the general economy.