Nearly every American sees the letters FICA at least once a week. While rushing out of the office or place of employment and scurrying to the bank to cash a well-deserved paycheck, the average American scowls at the roughly 8% the “FICA tax” inevitably consumes. Yet, ask any American what they plan to use to enjoy life after they retire and the answer is generally uniform: “my social security checks”. This answer has been repeated for over sixty-five years. Since President Franklin D.
Roosevelt’s New Deal, Americans have been receiving returned taxes for their retirement through a public policy known as the Old Age, Survivors, and Disability Insurance (OASDI), or better known as Social Security. Noted as one of the most successful government policy decisions in the United States’ brief history, Social Security has kept millions of Americans out of poverty and acted as fiscal life support for many others. Unfortunately, due to an explosion of population fifty years ago and a current population growth comparatively stagnant, Social Security is approaching a deep financial crisis.
Current estimates foresee negative growth within the next fifteen years and complete bankruptcy for the program in roughly thirty years. The financial crisis has created tension among current and future Social Security recipients as well as the nation’s legislators. However, despite an obvious need for decisive action and reform, the issue has barely surfaced in the recent pages of the Congressional Record. Why has nothing happened and when will something happen? The following report will answer these two questions and envelop a series of others.
Relying on past critical assessment of wide-ranging policy reform, the following will reflect on why Social Security legislation has been relatively ignored. The report will also examine the changes in the Social Security legislation and what new changes might become law when reform does occur. Finally, the report will deliver an optimal legislative environment for the reconfiguration of what has been the most stable government program in America history. Derived from Chancellor Otto Von Bismarck’s Prussian Plan for German workers, President Franklin D.
Roosevelt developed a plan to provide pensions for elderly Americans in 1935. After nearly six years of depression, the United States was ravaged with an unemployment rate of 25% and many others had lost everything they owned due to the collapse of the internal banking market. The future looked grim for most Americans because even those with jobs had barely any purchasing power due to enormous interest rates and high inflation. Riding high on his New Deal, President Roosevelt studied how Bismarck’s plan had worked so well in Germany and sought to develop a similar plan for America citizens.
On August 14, 1935, President Roosevelt succeeded in developing a national insurance plan and signed the Social Security Act into law (Sharp: 389). The Social Security Act of 1935 was set up to pay monthly benefits to retired workers starting at the age of sixty-five. However, before the Act went into effect in 1939, two new categories of recipients expanded the law. Dependants of the retiree were given benefits when the retiree passed away. Second, family members of a covered worker would receive benefits if the worker died before the benefits were distributed.
These new provisions modified the original bill and made it more of a family benefit than an individual benefit (Sharp: 390). After minor changes throughout the fifties and early sixties, Social Security’s most recent changes occurred under President Lyndon B. Johnson in 1965. Johnson established the Medicare program that provided health coverage to nearly ever American sixty-five or older, on top of their monthly Social Security check. Today, roughly forty-five million Americans receive monthly Social Security checks adding up to nearly $400 billion a year (Sharp: 391).
These checks have kept 43% of the elderly out of poverty and nearly one out of every five citizens over the age of sixty-five relies completely on Social Security as their only source of income. (Sharp: 393). The structure of Social Security is the primary reason it is in crisis. Though originally designed to be a fully funded insurance program, the crisis of the Great Depression forced legislators to provide immediate benefits before any significant tax revenue had matriculated. The system was tweaked and became a pay-as-you go system.
The new system has current taxpayers paying FICA taxes (Federal Insurance Contributions Act) to pay the benefits for current Social Security recipients. This transfer of wealth seemed to be the most efficient way to proceed with the program. The baby boom generation made the pay-as-you-go system work ideally. With more taxpayers than beneficiaries, the Social Security program has exceeded its payouts and will continue having a surplus, upwards to $70 billion a year, until sometime between 2015 – 2030 A. D. It is at this point when the system will begin to falter.
Baby boomers will now be the beneficiaries, only now the new generation “picking up the tab’ is much smaller in size and in return creates smaller revenue. The trust fund (the surplus noted above) will have to be tapped in order to cover all the benefits of the new baby boomer retirees. Not long after Social Security begins to lose money, it will become bankrupt sometime between 2025 – 2040A. D. , depending on who’s numbers prove to be accurate (Sharp: 400). The Social Security crisis, though still at least thirteen years away, is in shambles enough to cause an outcry among a variety of citizens.
From card-carrying AARP members to twenty-year-olds, Americans of all ages are worried about their Social Security “entitlement”. A majority of Americans in their twenties feel they will see a UFO before they draw benefits from Social Security (Clinton: 386). Thousands of citizens have pledged their support under a variety of Political Action Committees and their efforts to revamp or maintain the program. The following will contain options being offered by think tanks and lobbyists for legislators to overhaul Social Security. Many legislators and lobbyists have faith in the current system.
This resonating faith has caused many to devise a way to just reform the current policy’s numbers, lower some rates, or raise taxes to defer the bankruptcy certainty for a couple of decades. Obvious, easily adopted changes focus on the fringe numbers. One such change would be to simply raise the payroll tax a percentage or two in order to yield a higher return from current payers. Another idea, heralded by President Clinton during his time of high approval ratings and budget surpluses, was to simply allocate a larger amount of the general tax revenue into the Social Security trust fund.
Both measures have been opposed by tax lobbyists and a majority of conservatives as tax increases that will not solve the problem but just delay the inevitable (Certner). Another proposal focuses on lowering the level of benefits current beneficiaries receive through the Cost-of-Living-Allowances (COLAs). COLAs increase each Social Security check in comparison with the consumer price index. The Social Security Administration measures the previous year’s inflation and raises the amount each recipient receives accordingly.
Increasing the age a person becomes eligible for benefits has also been thought of as a way to delay bankruptcy, as well as decreasing the benefits paid to spouses and families. However, just as tax increases only delay the inevitable, so do the three above proposals (Certner). Yielded as the best solution to the Social Security dilemma by most free-marketers and conservatives, privatization of Social Security pensions has been presented by many think tanks and legislators as the best solution to fix Social Security.
President Bush backed the idea only four months into his first term and appointed a commission to hammer out the specifics. Privatization is a plan to create personal security accounts, PSAs, for each future Social Security beneficiary. Instead of the fixed 3% return already in place through treasury bonds (barely the inflation rate), a percentage or all of a retiree’s FICA taxes would be placed into the system individually. Each citizen would then have options, approved by the government, to invest in a broad portfolio of stock market funds and market mutual accounts.
Upon retirement individuals would draw from an accumulated account of their invested tax money. Proponents of this idea insist it will induce more money into the market to invest, increase the net savings of the entire economy, and create a larger rate of return for beneficiaries. However, privatization also includes higher risk because if the economy crashes or beneficiaries whittle away their investment, there will be many people in deep financial crisis (Shipman). The above information is the basic history and assumptions legislators have proclaimed to the public.
Each solution includes cracks and loopholes and only a legitimate effort for reform will save the Social Security program. In order to accomplish this goal, a number of things must happen in Congress and society. Foremost is an educated public. The following will try to explain the actualities of Social Security. Earlier in this report one can note the information concerning the Social Security surplus. Upward to $70 billion in surplus a year seems to be quite a large number. In fact it is, yet unfortunately it is never actually there.
The sneaky politicians in Washington manipulate the numbers to include the surplus as part of the federal budget, even though they consistently tell constituents the Social Security surplus is in a “lockbox” and is only used for paying out benefits. By including the surplus in the budget the legislators have been able to shrink the deficit and misinform the voters. For example, the 1997 federal deficit was recorded as a mere $34 billion. However, the truth is the deficit was more like $110 billion because the “trust fund” should not have been included (Garrett: 148).
This example highlights the real problems with Social Security. Nowhere in the legislation concerning Social Security does it say the government must pay out full benefits. When a specific council was set up to look into the matter of Social Security bankruptcy, the council concluded that … “in the absence of any changes full benefits could not be paid on time beginning in 2030” (Garrett: 152). Does this mean people won’t receive their “entitlement” in 2030? Sadly, the government could deny benefits, though it is highly unlucky because of the inevitable public outcry.
The government actually doesn’t even pay back what one puts in. It takes the average citizen twenty-three years to receive the amount they put in. Therefore the entitlement barely gets fully returned because not many citizens live to be ninety-eight years old. However, the fact is that the Social Security program isn’t an entitlement. Congress doesn’t have to allocate money and they show this lack of compassion each year when drawing up the budget. Even with the high surpluses of the 1990s no Congressperson offered to reduce spending to help fix the problem.
In fact, the last time Social Security was saved from destruction was during a bailout campaign in 1983. Congress and President Reagan tweaked the numbers to assure the program remained solvent. However, it was much easier then because the ratio of workers putting money into the program to beneficiaries was much larger than it will ever be again. The only way to bail out Social Security like 1983 would have to entail an expansion of immigration four-fold, or about 2. 5 million new workers from abroad each year for about forty years.
Each of the new 100 million immigrants would have to find jobs and living quarters, a nearly impossible feat even for the best economy in the world. To put this in perspective, the U. S. would have to attract double the amount of immigrants it took in at the beginning of the twentieth century (Garrett: 150-155). Obviously this type of population explosion is doubtful. Unless something is done to revamp the system, FICA and Medicare taxes, if unchanged, will have to be more than doubled to an average level of 28% to endure the influx of beneficiaries or benefits will have to be cut in half.
Such an increase in taxes, on top of the other payroll taxes, will cause the average American worker to lose nearly 60% of their wages in taxes. This will surely stunt growth and cause a severe negative impact on the economy (Garrett: 155). Once Americans learn the truth about Social Security, the setting for change will have been set. However, Congress must also have to be strategically oriented to induce change. This is where reform will hit a brick wall. The reason so many years have gone by without reform is because of the political weight Social Security carries.
Voter turnout is one reason Social Security has not been touched. With reelection the top priority for most Congressmen, they realize that 72% of citizens age 65-74 votes, compared to only 36% of 18-24 year olds who vote. This number alone acts as a deterrent to reforming Social Security. No Congressman will fight to change a program that might harm the constituents that elect him. However, slightly increasing the payroll tax has happened over they years because youth voters are more apathetic and less likely to turn an election over because they don’t vote with the numbers the elderly does (www. ensus. gov). Despite the hurdles and friction Social Security reform will definitely cause, change must happen and will happen. The political setting will have to be perfect and precise so as to create a platform where maverick-style Congressmen can force the issue onto the floors of the Capitol. Referring to a historic reform of similar magnitude might prove beneficial in assuming what type of national and beltway disposition will have to be in place to provoke change. The following will refer to a backbreaking reform in U. S. history and the setting that invoked such radical reform.
After sweeping tax cuts in 1981, one would think new tax changes would not happen until a new administration took control. However, with inflation rates and unemployment steadily on the rise, President Reagan and his aides saw problems on the horizon. The 1984 election was looming and with Democrats gaining ground in Congress Reagan saw it was time to restructure his past tax cuts. Too many special interests were sneaking through loopholes in the legislation and a number of tax shelters had sprung up in the periphery islands off the U. S. coast and throughout the nation.
Republicans, anxious to deter the stereotype of peddling for the rich they were branded with, started making legislative moves early in the 1984 election year. Reagan, during his State of the Union address, ordered the Department of Treasury to study the issue and report back in December, after the election was over. Democratic nominee Walter Mondale immediately took action, though hardly the right one. He blasted Reagan and stated his only memorable quote: “I may have to raise your taxes, so will Reagan, but he won’t tell you but I just did” (http://politicalwire. om). That one sentence led to Reagan’s rout of Mondale, carrying 49 states and the election (Birnbaum). Once Reagan resumed power in late 1984, his supply-side economists sprung into action. Treasury Secretary Donald Regan allowed only a few individuals into meetings to overhaul the system, fearing leaks to the press and Congress. However, shortly after the legislation began to take mold some of the actors began to disagree. They in turn leaked news to the press and Congress and the President had to stop the meetings. 1985 brought about new faces in the Treasury.
James Baker took over as Secretary as Regan moved up to be the president’s Chief of Staff. Baker was a political animal and knew how to work the Washington bureaucrats much better than Regan, a Wall Street junkie. Baker and his associates were trying to create a tax overhaul that would raise revenue. Again, many of the players writing the new legislation were dipleased with the direction it was taking and the second treasury was defeated as well. President Reagan decided his one-sided approach was failing and decided to send the project to the house and start from scratch (Birnbaum).
As 1986 came closer, the Republicans, led by President Reagan, devised a simple layout of what would have to be included to pass the legislation. The following lists the major points the Republicans felt they needed to follow. Create across-the-board tax cuts to carry enough Democrats Revenue neutrality in order to keep the deficit the same Distribution neutrality so each group holds equal amount of burden Daniel “Rosty” Rostenkowski (D-IL) was Ways and Means Chairman at the time and therefore had jurisdiction concerning the tax structure.
He was not a fan of new reform but the new political climate pushed him into the role. Rosty quickly realized the leverage he could create to become Speaker of the House and immediately engulfed himself in the issue. He offered the Democratic speech after Reagan’s State of the Union address. Rosty helped to create a set of transitional rules inside the House in order to phase in appropriation, i. e. pork barrel spending, requests to ensure some backing from his Democratic collegues. He called for a slight increase in the 1981 tax rates and set an entire month for debate.
After five days of pro-reform speeches and twenty-three days of con-reform speeches, the media began to catch on to the bleakness of the legislation. It was at this time the Ways and Means committee had to do something. Informally called the Pheonix Project, the committee began to vote in new loopholes in order to try and get the dying bill onto the floor for a vote. It was at this time that Rosty used his rough yet endearing personality to save the reform bill. Rosty defied his collegues and the many lobbyists who hounded them and opened the floodgates.
He leaked stories to all the major newspapers and made fools out of the bureaucrats on the Hill. The public outcry was enough to push the legislators to vote down the loopholes and they did, sending a legitimate tax reform bill to the house floor (Birnbaum). The biggest problem for the bill was now on the floor. The Rules Committee had to create the guidelines for debate and, led by Speaker of the House Tip O’Neill (D-MA), created a modified closed rule with only certain amendments and debate time allowed. The Republican Congressmen were furious. Congressmen Newt Gingrich and Trent Lott pushed to destroy these rules and they succeeded.
An open rule was ordered yet Speaker O’Neill decided against bringing the bill up for debate unless it had a legitimate chance to pass. President Reagan, anxious to see his initiative pass, invited all of the Republican Congressmen to the White House. He urged them to support the new bill. Reagan assured them he would veto any bill containing rates higher than 35% and threatened them. He let them know that his high approvale ratings would get more Republicans in the house in the fall if the bill passed. If they did not follow his plan then they would not be able to count on him for support in their upcoming elections.
This tough approach worked magnificently and the bill finally passed the House (Birnbaum). A bi-partisan effort was necessary for any such luck in the senate. Senator Bill Bradley (D-NJ) had been vying for a similar bill back in 1981 and he now saw the chance of his idea passing. Senator Bob Packwood (R-NE), more moderate than Majority Leader Bob Dole and many of his fellow Republicans, started out on a partisan course. He asked for over one billion in benefits to businesses to offset the shock the new bill would create. An immediate rebuttal by House Speaker O’Neill and no backing from his collegues forced Packwood to quickly drop his idea.
He signed on to a more moderate bill and, along with Bradley, the two offered up a bill to the Senate with new tax rates of 15%, 25%, and 35%. The Republicans and Democrats were satisfied. with the public demanding passage and the media swirling, the two bills went to Conference Committee and the Senate Bill ultimately passed. As Reagan had promised to his House colleagues, the top rate did not exceed 35%. President Reagan signed the Tax Reform Act of 1986 on October 22nd, 1986. The entire Congress had voted for the bill by a margin of 366 – 159, creating an image that the majority wanted this change.
However, if it was not for the efforts of Reagan, Rosenkowski, O’Neill, Packwood, Dole, and Bradley, this bill would have barely made it out of the House hopper ( Birnbaum). The path the 1986 Tax Reform Bill took is a legitimate historical reference for current legislators concerned with Social Security to study. A Republican Senate and Administration teamed up with a Democratic House to create sweeping Reform in an arena consumed with incremental change. Like Social Security, taxes are high on the priorities of constituents and meddling with the issue is certainly risky.
Disenfranchising voters on a high saliency issues is unacceptable unless the outcome will benefit the nation as a whole and keep the economy from floundering. There must be an honest bipartisan approach and the public must be educated on the issue enough to understand the logistics of change. Upon comparisons with such legislation as the Tax Reform Act of 1986, one may assume the legislative direction necessary to create Social Security Reform. The following will create the direction, agenda, and possible major players needed for Social Security reform to be as successful as the Tax Reform Act of 1986.
The most important role in creating Social Security reform is the public. Social reforms of the 1960s occurred due to a public outcry for equality, just as tax reform occurred due to a public outcry over fairness in the tax structure. Americans must soon realize the legitimacy of Social Security is quickly deteriorating and that their legislators will not call for reform unless forced. The elderly vote more than the rest of the population and no Congressmen is going to fight for an issue if they do not have the support of their entire consituency, otherwise they will be voted out before they have a chance to make any change.
Therefore it is a necessity for the entire voting public, from twenty-somethings to granparents, to call on Congress to fix the system. Once the public has created a sense of urgency concerning reform, a moderate, well-liked administration must get the ball rolling. Timing becomes everything. If the President at the time has the public’s attention, something like what President Bush holds now, he or she must make a legitimate call for Congress to make change. Reagan had a far-reaching administration; most Republicans followed his every word and many Democrats had grabbed his coattails as well. With such popularity Congressmen cannot gnore the President’s plea. The timing of the President’s call for action during his four years is negotiable. It will depend on approval ratings, reelection platform ideas, and the current tone on Capitol Hill. The control of each house in Congress will not necessarily need to be that of the Administration’s. Reagan’s tax reform was accomplished with a Democratic House and a Republican Senate. The underlying factor in tax reform will have to play the major role in Social Security reform: key players. Tax reform had powerful Democrats such as Rostenkowski, O’Neill, and Bradley to work alongside Republicans such as Dole, Packwood, and Reagan.
These six men played hardball politics with their colleagues and did what they had to do to make things work. In order for Social Security to be reformed, a conglomeration of powerful and respected leaders from both parties must be willing to take the lead. This is highly unlikely in the current Congress because leaders like Hastert, Daschle, Lott, and Gephardt are too split in ideology. Hastert is too conservative to make such change and to do so would require the President and Republican representatives to muscle him into position.
Also the current crisis in the Middle East and the war against terrorism are too much of a priority to put on the back burner while such dramatic reform is debated on the floor. The time will be right when the Middle East is more stable and the war on terrorism is not so young. In 1986 the legislators essentially ignored the special interest lobbyists hounding them in the halls of the Capitol. The Congressmen instead did most of their work behind closed doors and with the entire consituency in mind.
Social Security reform will affect the entire population and therefore an influx of special interest lobbyists will deter legislators from making fair decisions. Congress must take independent research and ignore the beltway insiders who will try to tilt the legislation in their favor. This must coincide with a bipartisan, equal-sided approach to reform. Just as in 1986, the President must include provisions to ensure the other party’s vote. Complete privitization will not pass, just as focusing on lowering benefits or raising taxes alone will not pass. Instead, facets of both policies must be integrated.
A number of bullets, comparable to Reagan’s plan for tax reform, should be instituted. Note the following points: No change in age requirement for receiving benefits Atleast a percentage of each FICA tax enrolled in a combined stock option Equal distribution of new expenses and new benefits Granted, these are only ideas, but a list similar to the above must be in place to ensure bipartisan support. Powerful Congressman like John McCain and Ted Kennedy will have to speak out and be willing to close the door on their special interest friends. The special-interest lobbyists cannot be allowed to sway the legislation.
Just as Representative Rostenkowksi did, a Congressman will have to step up and “open the floodgates” and notify the public of crooked colleagues and lobbyists. In 1986 it was Reagan threatening his Republican colleagues. When Social Security Reform reaches the floor, the President or a powerful member of Congress must stand up and force the issue to be debated in public on the floors of Congress. The public and the media will be everywhere and one person or two moderates must take the lead if passing Social Security reform has any chance to succeed.
The saliency of the issue will force the entire Congress to take a stance on the issue and each will have to make important decisions for their constituencies and their future. Hopefully, much like 1986, reform will pass and the Social Security program will not be passed on to the next Congress and closer to destruction. Social Security reform in the United States may still be years away. The fact that it is approaching its demise has not affected the public or Congress like it should and therefore it will not be brought up in Congress voluntarily.
However, time is running out. Social Security will begin to lose money in only a few short years and by the time this writer is fifty it will be all but a memory. That is unless something is done. The public must demand reform and the political climate must be perfect. It will be then that the President or Congressmen who takes the lead in protecting the future of millions of Americans will begin to earn every penny of their paycheck, except for the FICA tax that inevitably consumes 8% of it, but hopefully not much more.