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Rescuing Social Security

Copyright © 2004, 2005 by David E. Ross

Actually, I got you to view this page under false pretenses. Social Security is beyond rescue or repair. A whole new program is required to address the need to keep senior citizens from sinking into poverty once they retire.


Social Security Myths

Conspiracy Myth: Social Security was a socialist plot designed by Franklin Roosevelt during the 1930s.

Fact: The first social security law was enacted in Germany by Prince Otto von Bismarck (the "Iron Chancellor" under Kaiser Wilhelm II) in the late 1800s.

Republican Myth: A major flaw in Social Security is that it does not provide for investing in stocks for your retirement.

Fact: Social Security does not prevent you from also using a tax-sheltered retirement plan (e.g., IRA, 401(k)) to invest in stocks. You can also invest directly without using a tax-sheltered account. Actually, to have financial resources during retirement to maintain a standard of living similar to what you have before retirement, Social Security alone was never intended be sufficient; you will definitely need investments in addition to Social Security, not instead of Social Security.

What the Republicans propose, however, is that we should be able to divert some of our Social Security taxes into stock investments for our own retirement. Since the Social Security taxes paid by workers is actually paying for current benefits by those already retired — a pay-as-you-go system — such a diversion would leave insufficient funds for those benefits and cause Social Security to collapse, breaking a long-term promise to retirees and those approaching retirement.

Democratic Myth: Social Security only needs a little tweak to keep it solvent.

Fact: Combine a growing number of retirees and a increasing life-span with the effects of increased worker productivity and off-shore out-sourcing, both of which are inhibiting the growth of high-paying jobs from which the maximum Social Security tax is collected. Add the fact that Social Security is pay-as-you-go, with taxes from current workers paying benefits to current retirees. The result cannot be sustained without either major increases in the tax or major decreases in future benefits, either of which would lead to inter-generational political warfare. Minor adjustments around the edges of the program cannot provide long-term viability.

The most serious problem with Social Security has its roots in politics. As inflation required increases in Social Security benefits, Presidents and Congressmen of both parties noticed that the inflow of taxes still exceeded the outflow of benefits. Rather than raising taxes when such a move would not have been draconian, our nation's leaders allowed the program to become strictly pay-as-you-go, with the taxes paid by current workers used to fund the increased benefits to current retirees. Soon, we will reach the point where those who paid to maintain a decent level of benefits will not be able to receive the same level. The quandary is that either cutting benefits or raising taxes could trigger inter-generational warfare, at least in the ballot box and the economy.

Reform must address the following issues:

Reform of Social Security does not include privatization or diverting its revenues or assets into the stock market or other investments.

The hidden agenda of privatization advocates is to make the program optional. By eliminating government from the program, they hope to also eliminate its mandatory aspect. This of course, would place an unacceptable burden on those who have no other retirement resources.

Those who advocate diverting Social Security resources into the stock market are relying on the myth that we have no other good way to invest in stocks for retirement. They ignore how IRAs, 401(k) plans, and other tax-sheltered retirement savings plans already invest in stocks. And once we reach our maximum contributions to such plans in a year, nothing stops us from making investments directly into stocks and mutual funds outside of these plans. While stock investments can indeed provide excellent returns in the long term, the stock market does indeed fluctuate. Now (in 2004), the market has yet to recover the losses suffered since 2000. Thus, excellent returns are of little benefit to those retirees who need money now. In the meantime, the only persons guaranteed to profit from stock investments are the brokers who collect commissions on every stock purchase and again on every stock sale.

Social Security is intended to provide predictable, guaranteed benefits to retirees without regard to fluctuations in the stock market or whether an investment service remains solvent. No privatization plan or stock investment can provide such assurance.

What Can Be Done?

Note: I only address the Social Security program in terms of benefits for retirees and their spouses, the sole purpose of the original Social Security program. Benefits for disabled workers and dependent surviving children — added to the program later — are not addressed. Those should be in separate programs where their costs are separately funded.

A Letter to Congress


Taxes and Finance

Transition from "Old" to "New" Social Security


Personal Retirement Accounts

17 June 2004
Updated 25 January 2005

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