Social Security is codified in 42 USC Ch. 7 and has 21 seperate functions. Generally, it provides for the indigent, elderly, injured, and those who are any combination of the previous three or their children. The basic purpose of the law is paternalistic - some people cannot provide for themselves and their family, so the government chooses to help them. Pretty much every industrialized nation has a version of this social insurance. Of the three leading presidential contenders only Barack Obama has made his position clear on the issue, the other candidates have held their cards close to their chests making them hard to read.
The Social Security Administration explains the problem:
Based on the Trustees’ best estimate, program cost will exceed tax revenues starting in 2017 and throughout the remainder of the 75-year projection period. Social Security’s combined trust funds are projected to allow full payment of scheduled benefits until they become exhausted in 2041.
And they provide some solutions:
financial adequacy of the program for the next 75 years could be restored if increases were made equivalent to immediately and permanently increasing the Social Security payroll tax from its current level of 12.4 percent (for employees and employers combined) to 14.10 percent. Alternatively, changes could be made equivalent to reducing all current and future benefits by about 11.5 percent.
payroll taxes could be raised to finance scheduled benefits fully in every year starting in 2041. In this case, the payroll tax would be increased to 15.94 percent at the point of trust fund exhaustion in 2041 and continue rising to 16.60 percent in 2082. Similarly, benefits could be reduced to the level that is payable with scheduled tax rates in each year beginning in 2041. Under this scenario, benefits would be reduced 22 percent at the point of trust fund exhaustion in 2041, with reductions reaching 25 percent in 2082.
Barack Obama
supports increasing the maximum amount of earnings covered by Social Security and he will work with Congress and the American people to choose a payroll tax reform package that will keep Social Security solvent for at least the next half century.This is a version of the "raise the tax" solution.
John McCain,
believes that we may meet our obligations to the retirees of today and the future without raising taxes. [He] supports supplementing the current Social Security system with personal accounts .
The idea of private accounts isn't entirely new, but it has gained some traction in recent years. As the report notes, individuals could invest a portion of their Social Security taxes into a series of mutual funds and earn a higher rate of return than they would on by allowing the government to invest the money in government bonds. This could make up the tax/benefit gap I discussed above, but only after a phase-in period which would cost somewhere between $600B and $3T.
Hillary Clinton is largely mum on the topic, other than to say she disagrees with private accounts because
1) privatization leaves retirees vulnerable to stock market fluctuations or poor individual investment decisions.
2) the current Social Security system is progressive and assists women and families by indexing benefits to those who earn less. Women especially would be disadvantaged by a privatized system because they would have lower annual account deposits and would likely lose the advantage of spousal benefits.
3) fully one-third of payroll taxes are used to cover disabled workers and survivors. It is uncertain how the federal government could afford to pay these benefits if a percentage of the payroll tax is diverted into individual accounts.
4) the projected cost of changing to a privatized system while continuing to pay current benefits is estimated to be several trillion dollars in just the first decade, an unfunded liability that we can not afford.
I'll respond to Mrs. Clinton's concerns
1) The selection of mutual funds can be limited (to the TSP funds, for instance) to avoid a substantially risky investment. This is what a group of city workers in Texas did.
2) Of course, if you put nothing into the system, you get less out. This is an opportunity to advantage workers, not to punish non-workers.
3) The portion of SS Tax that goes to disability insurance will still go there.
4) This concern is legitimate, it is unclear where that money would come from.
Until next time.