SOCIAL SECURITY AND OTHER CURIOCITIES:

Will we live to regret the behavior of our government concerning Social Security and the general well being of our economy? The condition of our economy is reminiscent of the condition prevailing during my childhood. This period of my early existence I can not-now personally remember; I was only a few years old. However in early memory, our extended family conducted extensive political discussions and there was much argument. I learned much about the prevailing political and economic conditions as I was growing up. I particularly remember the atmosphere during meals at Thanksgiving and Christmas when the extended families were gathered. From these early family discussions my early childhood period appeared to be similar to the recent dot.com era and the same economic and financial excesses were current during both of times. Shortly thereafter, during the Hoover Administration, conditions changed. Changed drastically. The Great Depression was a long and depressing experience. That Great Depression was the impetus for Social Security, an agency to provide help for the un-cared-for young, the old and the infirm in a time of great economic stress. Let us hope we will not be in that great need of social security any time soon.

As an aside and of little consequence, before we get to social security, I remember a bet I made at the time of the first re-election of President Roosevelt when I was in third grade. I bet a nickel, a nickel that I did not have, that he would be re-elected. This comment an indication of political activity as a child. As I remember I have not changed a great deal I’m glad to say.

Social Security was organized to provide support to the aged, the infirm and survivors of one form of disaster or another. It is, however, not insurance or an annuity. It was organized, and remains, a pay as you go system that is supported by all who are gainfully employed whether blue collar, white collar, professional or entrepreneur. Social Security is funded by a fixed percentage tax on wages or salary, with an upper limit on the amount of income taxed. The percentage is fixed over all wages taxed. The tax rate has been changed at various times by act of congress. When the security system was planned it was felt that it could not be passed unless there was a limit on taxable income, nor could it be passed if the rate of taxation was tied to income. It was recognized that the economically powerful would not allow themselves to be taxed significantly greater than the poorer for this purpose. To this day that belief prevails. We therefore have a regressive social security tax today.

The income from the social security tax is primarily used to pay current benefits. Over recent years the congress has set the SS tax rate to provide an excess to be applied to future benefit payments. This was done to fix a perceived problem caused by the changing ratio of those employed to those receiving benefits. Less people paying into the system leads to deficit. The accumulated excess, by law, is invested at interest in US Treasury Bonds. At some future date, when benefits exceed income, the bonds will be redeemed to pay benefits. Pretty straightforward! With proper tax rates the system should remain stable.

We have recently realized that there is some question of the financial stability of Social Security. The current administration has predicted a date in the fairly near future when income will exceed benefits with the necessity of dipping into the social security reserves. Another date, sometime later, has been predicted when the reserves will be depleted. These dates vary fairly widely among the various predictors, usually depending on what they are trying to prove. Those with the strongest interest in radical change in the social security system predict the earliest dates.

We all know, those who have thought about it, what the possible solutions are. Simply stated they are; increase the tax rate, increase the retirement age, increase the upper limit of taxable income, institute a graduated tax rate, reduce benefits or as some may secretly, or not so secretly, desire; abolish social security completely and entirely.

Eliminating the last choice as the one least desired by most beneficiaries and probably rejected by most, a combination of the remaining can be made to solve the problem. Since a significant fraction of social security recipients derive more than half of their income from that source, a reduction in benefits certainly would be approaching hardship for many. The solution should therefore involve primarily some combination of the remaining possibilities. The priorities are somewhat arbitrary.

Considering first an increase in retirement age seems reasonable since workers are living longer and are generally healthier at retirement age. However, our economy is set up in such a way as to promote job elimination for the older employee, generally because they tend to earn more as they age. Experience and judgment accumulated with age seem to have little apparent monetary value. If an increase in retirement age becomes part of the solution it is imperative that meaningful work and income be made available during that period of life. That remains a rather serious problem today.

Increasing the income received by the social security system remains the most desirable solution and an arbitrary combination of the possibilities can be made to work. Work it must, the young workers of today believe they will never receive social security benefits. The older workers and present beneficiaries know that social security works and can be made to work in the future and they tend to vote to make it so. The younger worker must change attitude and help with the vote. Doing so will make it so.

It was mentioned previously that excess social security income, above that required to pay benefits, is invested in treasury bonds at interest. This is in effect a loan by the social security administration to the government and is generally used for current operations. When this money is needed by the social security administration the government must pay it back. The government, in essence, has no money other than that obtained by taxation. Tax money must therefore be raised to allow redemption of the bonds. It is then obvious that excess funds in the social security account, invested in treasury bonds, is no solution to the problem. Because, the government generally uses treasury funds for current expenses it must return those funds to the treasury when monies are needed to pay social security benefits. The excess social security funds might be set aside in an account exclusively for benefit payment, not to be used for any other purpose. But in that case the money is not available for current expenses and there is no interest income earned on those funds. These current expenses then must be funded by additional taxation. So nothing is gained either way. Taxation is required to pay these benefits in either case. Even the interest paid in the one case comes from taxes.

It is hard then to draw any other conclusion than that the funds to pay social security benefits must be raised at the time they are paid. Simply put, the government will have to either raise taxes or reduce services, or choose some combination, to pay benefits.

Money saved is productivity saved. Interest earned on saved money is earned productivity. To be productive Treasury Deposits must actually earn money.

Therefore this conclusion could be modified to some extent if excess social security funds were invested in privileged Treasury accounts as bonds for capitol improvement. There might also be a requirement that the bonds be paid back on a time schedule out of returns on these capital projects. Profits on toll roads and rail transportation improvements come to mind along with many others. This requires the electorate to take considerable responsibility to elect imaginative members of congress and other leaders in government. There is also a responsibility for the electorate to properly advise these leaders.

An alternate conclusion might be that there is a deliberate intention to completely destroy social security, as we know it. There is evidence that this is happening. Excessive tax reductions over long time periods will make it very difficult to redeem treasury bonds when the social security system needs their savings to pay benefits That and the addition of large expenses to social security such as the high initial costs associated with the diversion of funds required for private accounts can lead to the demise of the system.

Greatly increased government spending, both military and domestic, along with excessive tax cuts have produced large increases in the national debt with ever-greater increases, enhanced by heavy interest payments, predicted for the future. A large portion of the national debt is held by foreign nations and we will increasingly depend on that foreign source of funds in the future. Our badly distorted trade deficit adds greatly to our debt to foreign nations since we in effect borrow from the trading nations to finance the trade imbalance. This leads to what might be called national bankruptcy.

We have several decades to consider this problem if we care to take the time. The solution chosen will be up to the voters and their representatives when that time comes. The Social Security System can take care of itself for a while, however, Medical and Health Security is an immediate problem. Our attention and wealth are required now. We are spending too much money for what we get in return. Our leaders are for the most part ignoring this problem and trying to divert our attention with Social Security.