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SOCIAL SECURITY
How should Social Security be reformed? August 5, 1998 |
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Questions asked
in this forum:
Is there really a social security crisis? Is privatizing the only alternative we have to raising Social Security taxes? What risks do you see with privatization? What are the advantages of privatization? What happened to all of the money collected in the past?
Robert Davis of Urbana, Ohio, asks: All the discussion has been, and is now, about the future of social security. What I would like to know is what happened to all of the money collected in the past? Henry Aaron of the Brookings Institution responds:
Social Security reserves are now close to $700 billion and are projected to grow to $3.7 trillion. These are large sums, but they are small fractions of the total accumulated pension obligations to retirees and to active workers. Where did the money go to back up those pensions?
The first Social Security benefits were paid in 1940 to workers who had paid payroll taxes at a rate of only 2 percent and only for three years. These taxes would not have bought much of a pension. President Roosevelt and the Congress decided to pay those retirees, whose careers had been blighted by the Great Depression, benefits far greater than their payroll taxes would justify. Taxes by active workers covered the gap between the actual pension and the value of the retirees' own payroll taxes. The same process continued in 1941 and in later years.
This pension system is called pay-as-you-go. Taxes collected from workers are used to support current pensions, rather than to build reserves. Most private sector pensions were also pay-as-you-go. They too did not build reserves. The lack of reserves created serious problems when companies went bankrupt. In 1974 Congress enacted the Employee Retirement Income Security Act (ERISA), which required private companies gradually to build up reserves to support their pension plans. Although there is no risk that the United States will go bankrupt, it is time, I believe, to set similar standards for Social Security. Building Social Security reserves will add to national saving, boost economic growth, and help the nation prepare for the added costs that retirement of the baby-boom generation will impose.
Carolyn Weaver of the American Enterprise Institute responds:
The short answer is: it's been spent. Social security has been operating for a long-time as a "pay-as-you-go" system, meaning that benefits to current retirees have been met by taxes on current workers. Virtually all of the trillions of dollars that have been collected in taxes since 1937 has been paid out in benefits. Money in, money out. With pay-as-you-go financing, the government holds a very small reserve fund--equal to one-year's worth of benefits or so--and the reserve fund is invested entirely in U.S. bonds. The Social Security Administration can't just call the Treasury Department and ask to convert those bonds into cash. To raise the cash, the government would have to raise taxes or cut spending.
Today, social security has a somewhat larger reserve fund of government bonds, but it represents only a tiny fraction of the benefits that already are owed to workers on account of their past participation in the program. (Social security's unfunded liability is about $9 trillion.) Under a fully funded program, like a 401k plan or a personal savings account, assets must equal liabilities. No underfunding is possible.
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