Social Security Introduction ‘Social Security—the nation’s largest, costliest, and most successful domestic program has reached a critical juncture in its development. As its creators anticipated, nearly every wage earner now pays taxes into the system. In principle, all citizens may be eligible for “entitlements” at some point in their lives. Yet . . . senior citizens worry that their benefits will be cut; younger Americans are skeptical—if not cynical—about their own benefits upon retirement. ‘ — W. Andrew Achenbaum This summation of the state of Social Security was written more than a decade ago.
Looking back, it seems as though the Social Security system frequently reaches a state of crisis in which predictions of its end arise. Since it was enacted in 1935, Social Security has been amended often, most recently in 1983, when Congress imposed a tax on the benefits of high-income retirees, raised the retirement age, and revised the tax-rate schedule. Today, the future of Social Security is in the news again. On the 27th of January last year, President Clinton in his State of the Union address recommended that the projected federal budget surplus be used to save Social Security.
He proposed to reserve 100 percent of the surplus until all necessary measures to strengthen the Social Security for the twenty first century were taken. The reason Social Security is of such concern is that the extremely large group of citizens born in the post-World War II period—the much-discussed baby-boom generation—is heading toward retirement. The generation that will take its place in the workforce is far smaller in proportion to the number of retirees, raising fears about the sustainability of Social Security. In the past, proposed solutions to the various problems facing Social Security aroused great debate.
Each time, however, the arguments were stilled, repairs were made, and the system continued to fulfill its mandate. That uncertainty about the future has resulted in suggestions for change that range from minor adjustments to complete privatization of the system. What is Social Security? Social Security is a contributory social insurance program providing benefits to millions of Americans. Workers contribute financially to the system during their careers and earn entitlement to family benefits upon retirement, disability, or death.
Currently, nearly 44 million Americans receive benefits under the Old Age and Survivors Insurance and Disability Insurance (OASDI) programs that make up Social Security. This group includes some 30 million elderly retirees and their dependents, 6 million disabled workers and their dependents, and more than 7 million survivors of deceased workers. The Way Social Security is Financed About 96 percent of workers in the United States contribute to Social Security, paying a flat tax of 6. 2 percent of their wage income up to $68,400; their employers contribute an equal amount.
If, however, as many economists believe, employers shift the cost of Social Security taxes onto workers in the form of lower wages, workers in effect may actually bear a substantially larger share of the tax burden than employers. Self-employed people pay both their own and their “employer’s” share; their tax rate is 12. 4 percent, half of which is tax deductible for income tax purposes. 8 While the payroll tax is by far the largest source of funding for Social Security, a small amount of additional revenue is raised through the taxation of the Social Security benefits of high-income beneficiaries.
Social Security is largely funded on a pay-as-you-go basis. Social Security is not a “piggy bank” that employees put money into and then take out of when they retire. The benefits that today’s Social Security retirees receive are paid out of taxes collected from today’s workers that are earmarked for the payment of these benefits. Out of this tax money, the government writes Social Security checks and mails them to beneficiaries. Any money left over after paying benefits is put into the Trust Fund, which is invested in U. S. government securities to provide funds for future use.
What’s Right with Social Security Social Security provides a substantial number of workers and their families with insurance against the financial risks associated with the death or disability of a breadwinner. In 1996, the benefits paid by Social Security exceeded $347 billion. These benefits, in combination with Medicare health insurance, have dramatically reduced poverty for the aged in America. In 1959, the U. S. Census Bureau estimated that more than 35 percent of elderly Americans were poor. By 1996, in large part because of changes in the Social Security and Medicare systems, the poverty rate among senior citizens was 10. percent. Social Security retirement benefits are portable, following workers from job to job. In contrast, many employer-provided pension plans offer benefits only to workers who stay with the same company for an extended period of time. Social Security benefits are adjusted annually to protect against erosion caused by inflation, whereas private pension programs and insurance plans rarely guarantee such protection. Under Social Security, disability and life insurance coverage is provided without regard to the health of the individual. Workers with a very low wage are guaranteed a minimum benefit. 4 This progressive feature of Social Security helps give all workers in America a chance at a decent retirement, even if the type of work they did, or personal circumstances, did not enable them to accumulate wealth or become eligible for a private pension plan. The program runs smoothly, regardless of political or economic events. Unlike other entitlements, such as Medicaid and welfare, Social Security does not require state and local governments to participate in program financing or administration. Despite wars, economic recessions, and recent government shutdowns, Social Security checks have always reached recipients in a timely fashion.
What’s Wrong with Social Security? In 1935, after bank failures and a stock market crash had wiped out the savings of millions of Americans, the country turned to Washington to guarantee the nation’s elderly a decent income. The solution was Social Security. More than six decades later, with the gigantic Baby Boom generation approaching retirement age, Social Security faces a funding crisis. By about 2012 more money will be going out to Social Security recipients than will be coming in from workers’ payroll taxes.
At the same time, Americans are living longer. Projections of longer life expectancies and declining birth rates suggest that, after 2030, more than 20 percent of all Americans will be elderly, a larger proportion than ever before. This larger number of retirees will have to be paid their benefits from taxes collected from a smaller pool of workers, relatively speaking. The system’s trust fund can cover the difference for a while, but by about 2032 the trust fund will be empty and the program will no longer be able to meet all its obligations.
Without Changes, the Social Security Trust Funds May Be Depleted in 2032. Future Retirees Will Probably Receive Less Generous Benefits Than Today’s Elderly The benefit-to-contribution ratio on Social Security contributions has been declining since the establishment of the Social Security system. The earliest retirees paid low taxes for a short period of time and received sizable benefits upon retirement, consequently reaping substantial “returns” on their contributions.
Over time, as Social Security benefits became more generous and the number of individuals receiving benefits grew, the payroll tax was increased. The benefit-to-contribution ratio of Social Security has declined for each new cohort of retirees because later generations contributed to the Social Security system for the duration of their careers and were subject to higher payroll tax rates. Social Security’s Payroll Tax Is Regressive In 1998, Social Security’s 6. 2 percent payroll tax was assessed on only the first $68,400 of a worker’s earnings.
Because unearned income (interest and capital gains) is not subject to taxation under a payroll tax and earned income beyond $68,400 is not taxed, wealthy individuals pay a lower fraction of their total income in Social Security taxes than other people. Social Security May Encourage Early Retirement, Putting Added Pressure on the System Over the past fifty years, older Americans have been retiring at a progressively younger age. In 1950, 83. 4 percent of men aged fifty-five to sixty-four were employed; by 1990, only 67. 8 percent of men in this age group were working.
Today, most men and women retire before age sixty-five; in fact, almost 60 percent receive Social Security benefits at age sixty-two, when reduced benefits for early retirement first become available. Some economists are concerned that earlier retirement, combined with increased longevity, exacerbates the problem of economically sustaining an aging population. If the trend toward early retirement continues as the population ages, an even smaller share of workers will be supporting a larger proportion of retirees. Social Security – The Options Historically, politicians have had a simple, consistent position on Social Security: Do nothing.
Democrats steadfastly opposed tinkering, concerned that any changes would erode the safety net provided by a program they revere as the greatest and most inviolable legacy of the New Deal. And while many Republicans consider Social Security the ultimate Big Government program – with plenty of social engineering thrown in for good measure – they learned over time that its popularity with the voters made it untouchable. Facing the irreversible demographic trends, however, even staunch defenders of Social Security now acknowledge that it is time to talk about change.
A spirited bipartisan debate is raging, in Capitol Hill and across the nation, over a handful of possible changes all of which were considered unthinkable a few years ago: Cutting benefits across the board (or just for the wealthy); Raising the payroll tax across the board (or just for the wealthy); Raising the age at which retirees become eligible; Investing the trust fund more aggressively; Letting workers contribute to personal security accounts that the government would manage (or that workers would manage themselves). Privatization Proposals that call for investment in the private sector get most of the attention.
One school of thought calls for the system to invest some of its money in the financial markets, instead of in relatively listless government bonds. Supporters say that would create a windfall; opponents say it’s too risky. The most dramatic proposals would have workers place the bulk of their payroll taxes in individual retirement accounts that they could invest as they choose. Champions of this idea – mostly but not exclusively conservatives and libertarians – say it would boost returns and restore workers’ faith in the system.
A more moderate approach calls for the individual accounts to supplement a system that would be similar to the current one. More Than Just a Savings Plan Radical privatization would end Social Security as we know it. Social Security is not simply an investment vehicle or a pension program – and never has been. Today, Social Security provides benefits to about 43 million Americans, not only to retired workers but also to the spouses and dependents of workers who die prematurely and to disabled workers and their dependents.
Social Security looks to many people like a simple (if massive) retirement savings account. After all, you generally contribute through payroll deductions, then get money back after you retire. But Social Security in fact is a complex social program. By design, Social Security involves massive subsidies from the next generation of retirees to this one, from single workers to married couples, from two-earner couples to one-earner couples, from high-income earners to low, from the able-bodied to the disabled, and from those who die early to those who die late.
A mandated savings and investment plan can’t do what Social Security does today. Rather than redistributing benefits in intentional and socially conscious ways, a personal-investment plan could raise or lower people’s benefits based on such factors as investment ability, luck and timing. What happens to the Social Security guarantee if some investors do vastly better than others – or if the stock market collapses? And launching a new program would create a massive transition problem: If current workers started contributing into individual accounts, who would pay for the benefits of current retirees?
That amount, annually, is considerably more than the nation’s defense budget – about $362 billion in 1997. Supporters of privatization, however, argue that public confidence in Social Security has eroded so far that the only way to restore workers’ faith in the system is to give them control. They say privatization alone can strengthen the safety net and restore the long-term solvency of the system without increasing taxes. Effect on the Budget Often ignored in the debate is the inevitable effect that the huge increase in payouts to retiring Boomers will have on the federal budget.
That’s because, in some ways, the Social Security Trust Fund is a fiction. It technically holds government bonds, but – as a way of disguising the size of the federal deficit – the government doesn’t count those bonds as debt. So in about 15 years, when the trust fund starts turning in its bonds for cash to pay benefits, the government will have to raise that cash. It can do so in only three ways: by increasing taxes, cutting other spending or running a deficit. Conclusion Social Security has been one of America’s most successful antipoverty programs, saving millions of elderly from living out their lives in poverty.
Likewise, the program has provided important protection for families after the death or disability of the family’s breadwinner. It is clear that the system will require some modifications in order to accommodate the retirement of the exceptionally large baby-boom generation. However, the debate over and implementation of policy changes must be carried out in a deliberate and responsible fashion. The financial security of America’s elderly is too significant for “bumper sticker politics” or ninety-second campaign commercials.
Corporate Welfare Corporate welfare should be carefully defined as any government-spending program that provides unique benefits or advantages to specific companies or industries. That includes programs that provide direct grants to businesses, programs that provide research and other services for industries, and programs that provide subsidized loans or insurance to companies. There are more than 100 such corporate subsidy programs in the federal budget today, with annual expenditures of roughly $75 billion.
Terminating those programs could save taxpayers more than $400 billion over the next five years. Some analysts employ a broader definition of corporate welfare that includes targeted corporate tax loopholes. But allowing corporations to keep more of their own earnings is not a form of welfare. It is their money, after all. To label such loopholes as welfare, one essentially must maintain that all money belongs to the government, and thus any portion that government allows you to keep is a gift.
Furthermore, simply closing tax loopholes without simultaneously reducing tax rates would put billions of more dollars into the hands of the federal government. American businesses are certainly over subsidized, but they are also overtaxed and over regulated. The last thing that is needed is a tax hike. Nevertheless, targeted tax breaks are certainly bad policy. Because they provide special treatment for politically powerful industries, such tax breaks run counter to the notion that all taxpayers should be treated the same.
Furthermore, targeted tax breaks create distortions in the workings of the economy. Government steps in and creates an uneven playing field by granting tax breaks to particular industries. As a result, our economy’s resources do not go toward their most efficient use, which makes it more difficult for America’s businesses to be successful. While targeted tax breaks are not corporate welfare, they are bad public policy and should be eliminated. However, such tax reform should only be done on a revenue-neutral basis, or preferably as a net tax cut.
That is, since closing loopholes broadens the tax base, tax rates must be correspondingly reduced to avoid an overall increase in taxes. The federal government currently spends roughly $75 billion a year on programs that provide subsidies to private businesses. Two years ago both Congress and the Clinton administration pledged to attack that pervasive corporate safety net. They have had very little success. Virtually every corporate welfare program that existed in 1994 is still squandering taxpayer dollars today. Many have had their budgets increased.
If the size and cost of the federal government are ever going to be reduced, those taxpayer rip-offs must be eliminated. Categories of Corporate Welfare Working from the definition of corporate welfare as “any government-spending program that provides unique benefits or advantages to specific companies or industries,” we identify three main categories of corporate welfare. Direct Grants to Businesses Perhaps the most egregious example of corporate welfare is the Agriculture Department’s $100 million a year Market Access Program (formerly Market Promotion Program).
Created in 1985, MAP gives taxpayer dollars to exporters of food and other agricultural products to offset the costs of their overseas advertising campaigns. Though there is an amendment offered to de-fund this program every year, it has somehow managed to survive. Another example is the Commerce Department’s Advanced Technology Program ($200 million a year), which gives research grants to consortiums of some of the nation’s largest high-tech companies. Those grants allow private companies to use taxpayer dollars to help them develop and bring to market profitable new products.
Programs That Provide Research and Other Services for Industries The Agriculture Department’s Agricultural Research Service ($700 million a year) conducts research focused on increasing the productivity of the nation’s land and water resources, improving the quality of agricultural products, and finding new uses for those products. Those activities enhance the profitability of one specific private industry, the agricultural industry. The Energy Department’s Energy Supply Research and Development Program ($2. 7 billion a year) aims to develop new energy technologies and improve on existing technologies.
Its activities include applied research-and-development projects and demonstration ventures in partnership with private-sector firms. The Commerce Department’s National Oceanic and Atmospheric Administration ($1. 9 billion a year) provides services such as mapping, charting, and weather forecasting that are beneficial to specific private industries. Furthermore, those services are already being provided by the private sector. Programs That Provide Subsidized Loans or Insurance to Businesses The Export-Import Bank ($700 million a year) uses taxpayer dollars to provide subsidized financing to foreign purchasers of U.
S. goods. Its activities include making direct loans to those buyers at below-market interest rates, guaranteeing the loans of private institutions to those buyers, and providing export credit insurance to exporters and private lenders. Similarly, the Overseas Private Investment Corporation ($70 million a year) provides direct loans, guaranteed loans, and political risk insurance to U. S. firms that invest in developing countries. The Problem with Corporate Welfare Corporate welfare programs are often purported to be pro-business. They are not. Such programs do nothing to promote a freer economy.
They make it less free. Here are seven reasons why such policies are misguided and dangerous: The federal government has a disappointing record of picking industrial winners and losers. The average delinquency rate for government loan programs (8 percent) is almost three times higher than that for commercial lenders (3 percent). The Small Business Administration delinquency rate reached over 20 percent in the 1980s, and the Farmers Home Administration delinquency rate has approached 50 percent. Corporate welfare is a huge drain on the federal treasury.
Every year $75 billion of taxpayer money is spent on programs that subsidize businesses. Meanwhile, politicians proclaim that America cannot afford a tax cut. Corporate welfare creates an uneven playing field. By giving selected businesses and industries special advantages, corporate subsidies put businesses and industries that are less politically well connected at a disadvantage. Corporate welfare fosters an incestuous relationship between business and government. All too often, the firms and industries that contribute the most to political campaign coffers are the largest recipients of government handouts.
Corporate welfare programs are anti-consumer. For instance, the Commerce Department has estimated that the sugar subsidy program costs consumers several billion dollars a year in higher prices. Corporate welfare is anti-capitalist. As Wall Street financier Theodore J. Forstmann has put it, corporate welfare has led to the creation in America of the “statist businessman,” who has been converted from a capitalist into a lobbyist. Corporate welfare is unconstitutional. Corporate subsidy programs lie outside Congress’s limited spending authority under the Constitution.
Nowhere in the Constitution is Congress granted the authority to spend taxpayer dollars to subsidize the computer industry, or to enter into joint ventures with automobile companies, or to guarantee loans to favored business owners. The central premise behind corporate welfare programs is that the best way to enhance business profitability is to do so one firm at a time. In fact, the best thing government can do to promote economic growth is to simply get out of the way and let private entrepreneurs with their own capital at risk determine how the economy’s resources will be directed.
That means creating a level playing field, which minimizes government interference in the marketplace, and dramatically reducing the overall cost and regulatory burden of government. Terminating the dozens of unnecessary corporate welfare programs and reforming the tax code are essential parts of bringing that about. Congress should terminate programs that provide direct grants to businesses; eliminate programs that provide research and other services for industries; end programs that provide subsidized loans or insurance to businesses; eliminate trade barriers designed to protect U.
S. firms in specific industries from foreign competition at the expense of higher prices for American consumers; base defense procurement contract decisions on national security needs, not on the number of jobs created in key members’ districts; and eliminate the income tax loopholes carved out solely for specific companies or industries and substantially lower the tax rate so that there is no net revenue increase. Conclusion Some companies receive public services at reduced rates, while all others pay the full cost.
Some companies are excused from paying all or a portion of their taxes due, while all others must pay the full amount imposed by law. Some companies receive grants, low-interest loans and other subsidies, while all others must fend for themselves. In the end, that’s corporate welfare’s greatest flaw. It’s unfair. One role of government is to help ensure a level playing field for people and businesses. Corporate welfare does just the opposite. It tilts the playing field in favor of the largest or the most politically influential or most aggressive businesses. All this is in service of a system that may produce jobs in one city or state, thus fostering the illusion of an uptick in employment. But it does not create more jobs in the nation as a whole. Market forces do that, and that’s why 10 million jobs have been created since 1990. But most of those jobs have been created by small- and medium-size companies, from high-tech start-ups to franchised cleaning services. FORTUNE 500 companies, on the other hand, have erased more jobs than they have created this past decade, and yet they are the biggest beneficiaries of corporate welfare. Donald L. Barlett In conclusion, Corporate Welfare must be cut down to a minimal amount. There should be strict controls and regulations. With the destabilizing effects of corporate downsizing on American workers and their families, we should not be providing incentives for American corporate giants to invest abroad; taking advantage of low wage costs, lower standards, and often-exploitative working conditions of Third World countries, rather than reinvesting and creating good jobs at home.
We need to raise their standards toward ours, not lower ours to meet theirs in this increasingly global economy. It is also important for us, the consumers, to be aware of the products we buy and actively save the economy. Voters need to pay importance to social and ecological issues rather than the bottom line. They need to be better educated and informed about the issues concerning corporate welfare to make politicians aware that the people voting for him/her are against it.
