No crisis yet, but... 

By all accounts, the Social Security clock is running, and the sound it’s making is boom-boom-boom — the sound of the Baby Boomer generation heading toward retirement age.

Last Monday, at a forum sponsored by Coastal Democrats, two economists and an AARP lobbyist discussed the current state of the 70-year-old federal retirement insurance program as well as projections on its fate. They also evaluated some of the proposals being discussed in Washington for slowing down that clock.

All three experts were quick to discount the Social Security situation as a crisis (a description that circulated in the media earlier this year following President Bush’s state of the union address), but all three labeled it another way.

“It is a problem but it’s not a crisis,” said Kathy Floyd, Associate State Director of Advocacy for the AARP in Georgia. AARP (formerly the American Association of Retired Persons) is a nonprofit, nonpartisan organization for people age 50 and over, with 35 million members nationally, according to their website.

“Social Security does have a problem, and the Baby Boom is the name of that problem,” said Dr. John Brown, Associate Professor of Economics at Georgia Southern University.

At the forum, Brown’s role was to provide an overview of the existing Social Security system and its projected future if it continues operating as it does today.

Dr. Michael Reksulak, Brown’s colleague from Georgia Southern’s School of Economic Development, presented a synopsis and analysis of “The 6.2 Percent Solution: A Plan for Reforming Social Security,” by Michael Tanner, a 2004 policy paper of the libertarian think tank The Cato Institute.

Floyd provided a critique of the Cato proposal and described AARP’s positions on Social Security reform.

In 1935, Social Security was established as what Brown called a “pay as you go” insurance program, intended to bring elderly Americans out of poverty.

“In 1935, only one third of people over 65 could support themselves,” said Brown. “Another one fifth received public assistance. The remaining 50 percent had to rely on being supported by family members or others. Prior to Social Security, the elderly were the poorest segment of the American populace.”

Since it began, the Social Security fund has run at a surplus; collecting more revenue than is being paid in benefits. The surplus is held in a “trust fund” consisting of Treasury bill investments, which generate about 6 percent interest. As the T-bills mature, they are routinely reinvested. Although the trust fund has grown modestly over the years, the amount of the annual overage has steadily declined.

That’s where the Baby Boomers--Americans born between 1946 and 1964--come in. Brown noted that the oldest of this generation will begin retiring in five years. As they begin to collect Social Security benefits, the number of retirees will eventually exceed the number of workers paying into the system.

Thanks to the Baby Boomers, in 2017 (give or take three years according to the panel) for the first time ever, the fund will no longer be collecting enough in taxes to pay the benefits it owes.

Dr. Reksulak, an Assistant Professor of Economics who specializes in public finance and public policy, says that the existing trust fund will allow Social Security to continue at the 2017 benefit level until approximately 2041, if you believe the Social Securities Trustees report; or until 2052, if you believe the Congressional Budget Office.

After that, most projections show that in order for the fund to continue to operate as “pay as you go” at the current benefit level, something will have to change. If nothing changes, benefits will need to be reduced.

The Cato Plan, its derivations in Washington, and the AARP reforms are all being proposed as mechanisms that will prevent the Social Security fund from going into deficit mode, i.e. the point at which Social Security fund’s expenses (benefits paid to retired workers) will exceed its revenues (taxes collected from current workers.)

In his remarks, Reksalek said that according to the Cato Institute, payroll taxes will have to increase by 18-50 percent when the trust fund is depleted, unless changes are made to the plan.

The fundamental premise of Cato’s “6.2 Percent Solution” would allow individuals a choice: continue to participate in the traditional program or opt “to divert their half (6.2 percentage points) of the payroll tax to individually owned, privately invested accounts” according to handouts by Dr. Reksulak.

The Cato plan is widely regarded as the basis for a Social Security proposal President Bush outlined in his state of the union address in February.

Said Reksulak, “There’s no such thing right now as a Bush plan” for Social Security, but noted that the Cato Institute proposal has “a lot of influence” in the current administration.

Will the 6.2 percent solution or its imitators correct the problem of the Social Security fund exhausting its reserves and running at a deficit? Not according to this panel of experts.

None of the panelists think that allowing individuals the option of investing a portion of their contributions to Social Security into private accounts would help close the gap between the revenue line and the expense line on the Social Security graph.

“The administration has admitted that private accounts don’t solve the problem,” said Kathy Floyd, the AARP lobbyist.

The AARP has suggestions to close the funding gap. They support raising the wage base for Social Security contributions from the current maximum of $90,000 to $140,000, phased in over ten years. When completely phased in, this strategy alone “would lower Social Security’s projected shortfall by 43 percent” according to Congressional testimony in January by AARP Vice President Douglas Holbrook.

Another AARP reform plank, diversifying the reserve, sounds like privatization at a collective instead of individual level. In his January testimony to the Senate Democratic Policy Committee, Holbrook recommended that some of the Social Security reserve be invested in “a broad index fund that could yield higher returns” than the 6 percent interest earned by Treasury bills.

While all three panelists agreed that the next 15 years will be a critical time for Social Security, each also cautioned against placing too much stock in projections being made for the long term. Projected dates for the fund returning to solvency range from 2050 to infinity, according to comments by Floyd and by hand outs she supplied from the Washington Post.

“When Congress looks at a new program they look at [its cost over] a ten-year time frame,” she said. “A lot of the costs are shoved into the later years.”

Yet the Cato report identifies 2050 as the break even date” for their proposal.

“The 75-year projections are chancy. They do not represent the truth with a capital T,” said Brown. “A whole string of factors will affect the ability of the fund to pay benefits. That projection is probably better described as science fiction rather than science.”

Brown concurred with several audience members that other federal programs vital to so many were in more pressing need of attention, especially Medicare, which he noted will be exhausted in about ten years.

“If Social Security is a hand grenade, then that’s the Hiroshima bomb waiting to go off.”


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