Is privatization for Social Security the answer?

Second of three parts

During the Reagan Administration in 1985, the Social Security Trust Funds were moved “off budget” so that the funds earmarked for the Social Security system could be tracked separately from the rest of the budget. Prior to this move, Social Security was nearly 20 percent of the overall federal budget.

The Social Security Trustees produced a report in 1996 that revealed to the American public that Social Security would encounter “a deficit” in 2012 and all of the funds in the system would be exhausted by the year 2029. The advisory panel comprised of trustees for Social Security agreed that some or all of the funds should be invested in the private sector. They also agreed that in order to keep Social Security actuarially sound, the payroll taxes collected from employees and employers would need to be at least 18 percent and the benefits of Social Security recipients would need to be decreased by 30 percent.

Another report generated by the Social Security Trustees in 1999 indicated that the “unfunded liability” for the system had increased to an astounding $752 billion (unfunded liability refers to the accumulated cost of benefits previously earned by active and retired members but not yet collected or paid). Economists at the time proclaimed that if the unfunded liability for Social Security continued to increase, the long term negative fiscal impact would be in the “trillions”.

Congress designed Social Security to operate as a “pay-as-you-go system.” This essentially means that no money is actually set aside by the U.S. government to pay the benefits in the future. Thus, when the workers and employers pay taxes into the trust fund for Social Security, most of the funds are paid out to today’s retirees and those on disability. Any “left over taxes paid by workers and employers” goes directly to the U.S. Treasury in exchange for federal IOU’s and are used to finance the national budget.

In 1996, the amount of benefits collected from employees and employers was estimated to be in the vicinity of $387 billion and about $355 billion was dispersed to nearly 45 million Social Security recipients in America. Since 1996, the differential (or surplus) between what has been collected verses what has been paid out to recipients, has been reduced dramatically. And because of the increase in the number of retirees anticipated within the next four decades, the differential will continue to shrink and the system will be in serious trouble when the differential no longer exists.

Trust fund critics have noted that the Social Security system would not be in dire straits fiscally if the leftover payroll taxes for Social Security were not diverted to the U.S. Treasury and all of the funds were deposited into the Social Security Trust Fund. Thus, the fund would grow on an ongoing basis as opposed to continually being depleted.

And with the projected number of retired workers increasing from 45 million to nearly twice that amount in 2040, the fund will clearly require a significant amount in order to pay and meet the obligation to the Social Security recipients, as well as containing the detrimental increases of unfunded liability.

Since the U.S. government has not changed the practice of taking the leftover tax dollars for years that should have remained in the Social Security trust fund, then the system might be placed in a fiscal predicament within the next several decades simply because more funds will be going out and the influx from payroll taxes from both employees and employers will not be able to keep pace with the outflow to Social Security recipients. Moreover, since it does not appear that the U.S. government plans to terminate the practice of taking the leftover payroll taxes for the U.S. Treasury because of there is a need to finance the national budget; and the fund is not expected to receive any funding from any other governmental source, then the serious problem of the Social Security system encountering bankruptcy within the next four decades appears to be inevitable.

To make matters even worse, the federal government has a national debt that has made it virtually impossible to place any funds aside to counter the insolvency of the Social Security system. The solution presented by the democratic congressmen and senators is to gradually increase the payroll taxes and terminate placing the leftover payroll taxes in the U.S. Treasury.

Dr. Jesus D. Camacho
Delano, California