The Dirt on Social Security

Mr. Bolin

Economics 04_05H Program Evaluation

Social Security

1. What is the history of the Social Security program?
   1. The Social Security program in the United States ultimately grew out of people's need for economic security. Early sources of economic security included assets, labor, family, and charity. However, as economies grew to become city-based instead of farm-based, guilds, then friendly societies, then fraternal organizations emerged, all of which later grew into labor unions. Guilds, friendly societies, and even fraternal organizations were originally organized around a certain field of work with workers of the same trade joining together to help each other. According to “Historical Background and Development of Social Security,” “the English Poor Law of 1601 was the first systematic codification of English ideas about the responsibility of the state to provide for the welfare of its citizens.” (2012) These ideas were then carried to the United States by English colonists and formed the foundation for American policies toward the state's role in providing economic security to its citizens. This foundation was based on the idea that people needed to be discouraged from being poor and becoming dependent on aid as much as possible, so the poor were catered to accordingly in the almshouses/poorhouses and in all the aid they received. “Revolutionary war figure Thomas Paine” was the first to “propose a scheme for retirement security” that involved individuals paying parts of their inheritances in taxes toward a fund that would later provide for them in old age. (“Historical Background” 2012) In 1862, Civil War pensions became the first form of government managed social security for veterans (of the North) and their families. By 1935, as a result of the Great Depression, thirty different states had set in place some type of old-age pension. However, these programs were largely unsuccessful because of poor management and enforcement. Social Security as we know it was finally begun in August of 1935 when President Roosevelt signed the Social Security Act. According to Social Security Online, “in addition to several provisions for general welfare, the new Act created a social insurance program designed to pay retired workers age 65 or older a continuing income after retirement.” (“Historical Background” 2012) Since its creation, the Social Security program has grown and expanded to provide improved living conditions for millions of elderly and disabled across America.
      
2. Who benefits from the Social Security program and how?
   1. According to the Legal Information Institute of the Cornell University Law School, Social Security's main function is the provision of income to individuals who's “normal flow of income shrinks because of retirement, disability, or death.” (“Social Security Law” 2010) Gary Sidor of CRS Web describes Social Security beneficiaries saying:
      
      Retired workers and their eligible dependent family members, as well as the dependent family members of deceased workers, receive benefits from the Old-Age and Survivors Insurance trust fund. Disabled workers and their eligible dependent family members receive benefits from the Disability Insurance trust fund. (2005)
      
      A worker must have invested in the Social Security system by paying a payroll tax for at least 40 calendar quarters in order to qualify for Social Security benefits. Qualified workers become fully eligible to receive those benefits when they reach the full retirement age, currently set at 67 years; however, exceptions may be made for those who become disabled at a younger age.
      Social Security beneficiaries receive a specific amount of benefits determined by the “benefits formula.” This formula “calculates a worker’s average, indexed monthly earnings (AIME), which is based on the highest 35 years’ earnings on which they paid Social Security taxes” and then “adjusts these lifetime earnings, or indexes them to changes in average wages, to account for the fact that earnings across all workers grow over time.” (“Social Security Reform” 2005, 8) After that, the formula is used to determine a said person's benefit entitlements. So as to provide adequate incomes for all beneficiaries, “Social Security’s benefit formula is designed to be progressive, that is, to provide disproportionately larger benefits, as a percentage of earnings, to lower earners than to higher earners.” (8) According to the Government Accountability Office, almost two-thirds of the elderly in the United States get more than half of their income from Social Security, and one-fifth of elderly Americans receive no income other than Social Security. (“Social Security Reform” 2005, 4 ) Social Security provides for all workers who have adequately contributed to the program over their working life when they reach the full retirement age.
      
3. What is the yearly cost of Social Security to the American taxpayer? What is the historical cost data for the program?
   1. The American taxpayer who is covered by Social Security pays 7.65% of their earnings toward the Social Security fund each year, with their employer paying another 7.65% of the company revenue toward the fund also. Self-employed workers, on the other hand, pay around 15.30% of their earnings toward Social Security each year, but they receive two different tax breaks that are not available to workers and employers.
      The historical cost data for the program can be seen in Figure 1, taken from Social Security Online.
      Figure 1
      
      

Calendar year	Tax rates as a percent of taxable earnings
	Rate for employees and employers, each			Rate for self-employed workers
	OASDI	HI	Total	OASDI	HI	Total
1937-49	1.000	--	1.000	--	--	--
1950	1.500	--	1.500	--	--	--
1951-53	1.500	--	1.500	2.250	--	2.250
1954-56	2.000	--	2.000	3.000	--	3.000
1957-58	2.250	--	2.250	3.375	--	3.375
1959	2.500	--	2.500	3.750	--	3.750
1960-61	3.000	--	3.000	4.500	--	4.500
1962	3.125	--	3.125	4.700	--	4.700
1963-65	3.625	--	3.625	5.400	--	5.400
1966	3.850	0.350	4.200	5.800	0.350	6.150
1967	3.900	0.500	4.400	5.900	0.500	6.400
1968	3.800	0.600	4.400	5.800	0.600	6.400
1969-70	4.200	0.600	4.800	6.300	0.600	6.900
1971-72	4.600	0.600	5.200	6.900	0.600	7.500
1973	4.850	1.000	5.850	7.000	1.000	8.000
1974-77	4.950	0.900	5.850	7.000	0.900	7.900
1978	5.050	1.000	6.050	7.100	1.000	8.100
1979-80	5.080	1.050	6.130	7.050	1.050	8.100
1981	5.350	1.300	6.650	8.000	1.300	9.300
1982-83	5.400	1.300	6.700	8.050	1.300	9.350
1984 a	5.700	1.300	7.000	11.400	2.600	14.000
1985 a	5.700	1.350	7.050	11.400	2.700	14.100
1986-87 a	5.700	1.450	7.150	11.400	2.900	14.300
1988-89 a	6.060	1.450	7.510	12.120	2.900	15.020
1990 and laterb,c	6.2	1.450	7.650	12.400	2.900	15.300

(“Social Security...Tax Rates” 2012)

In the table, OASDI refers to Social Security's Old-Age, Survivors, and Disability Insurance program, while HI refers to Medicare's Hospital Insurance program. It can be seen that Social Security payment rates have been rising steadily to keep up with inflation and the changing cost of living.

4. What percent of the total Federal budget is spent on Social Security relative to other programs?
   1. Gary Sidor of CRS Web says that Social Security made up an estimated 21.4% of all yearly Federal outlays in 2004. (2005) However, the percent of the Federal budget that is spent on Social Security has been growing. According to D. Austin (Analyst in Economic Policy) and Mindy Levit (Analyst in Public Finance), in Fiscal Year 2011, “Social Security [sic] accounted for a fifth of federal spending. (2012)
5. What is the impact of this program on price stability, full employment, and economic growth?
   1. Social Security is affected more by price stability than it is able to affect price stability. According to Jonathan Aldrich, speaking of the late 20^th century, “Social security expenditures in many countries were linked to increases in consumer prices,” and “inflation followed a generally increasing trend in most industrialized countries,” which led to a generally increasing Social Security rate to provide for the elderly who were facing higher prices as the inflation increased. (1982, 6) Social Security has little affect on price stability, but price stability strongly affects Social Security rates.
      Likewise, Social Security can be affected by full employment, but cannot directly affect full employment in the economy. If the economy isn't at full employment, the government is probably going to make full employment and stable prices their main goal instead of savings and capital formation. (Hambor 1987, 3) Therefore, the lack of full (or near full) employment in the economy can effect how much Social Security is able to affect economic growth.
      If the economy is operating at or near full employment, Federal fiscal policy will probably be focused on savings and capital formation. In that case, the increase in government savings, that is, the surplus in the Social Security trust fund, would show up in the capital market “as an increase in the supply of investment funds, either directly through increased Federal debt retirement in the case of higher budget surpluses or indirectly through reduced Federal borrowing in the case of lower deficits.” (Hambor 1987, 3) The additional funds cause interest rate reductions which encourage “interest-sensitive” endeavors, such as investments in the upstart of a new businesses or investments in large purchases that require loans – like vehicles or homes. (3) The increases in “interest-sensitive” spending caused by the lowered interest rates will urge on overall economic growth, making the Social Security trust fund a tool for the furtherance of economic growth when the economy is operating at or near full employment.
      
      
6. What is the potential impact of Social Security beyond the direct payment recipient?
   1. Beyond the obvious impacts of Social Security – the provision of income for those who have lost their ability to earn income – Social Security has other indirect impacts. First, it helps to reduce poverty rates among the elderly and disabled, bettering the lives of many. Second, it stimulates the economy by providing the elderly and disabled with more purchasing power than they might otherwise have. Third, it increases the life expectancy of individuals who are covered by Social Security by providing them with the finances they need to receive proper medical and health care and to live healthy lifestyles after retirement.
      
      
7. What are the professional opinions in support of and against the Social Security program.
   1. The majority of the American public supports Social Security. More specifically, eighty percent of individuals over age 65 agree that Social Security is “one of the very most important government programs,” and “ninety percent of those ages 18 to 29 deemed Social Security important.” However, only one-third of all of the individuals who took part in the survey referred to above had any sort of confidence in the Social Security program's future. (Span 2010) Those who do not support the Social Security program do not support it because they think it is unstable or because they distrust the government's hand in personal affairs in general. LZ Granderson, a CNN contributor, is one of the few individuals who speaks out against Social Security directly, saying, “Call me crazy, but the idea of trusting the government to take care of me, to provide me with "security" when I'm old and frail is far more frightening than the thought of me trying to make it on my own.” (2011) Again, Granderson is in the minority as the majority of the American public supports Social Security; however, there are many who believe that the program needs reformed in order to survive. Robert Pear of the New York Times states that the Social Security fund is “unsustainable without structural changes that have so far eluded Congress and the administration.” (2012) The three most popular suggestions for the reorganization of the Social Security program include the trust fund being invested in stocks to earn interest, subjecting individuals to means tests so that only those who need aid most will receive it, or privatizing the program so that individuals have more control over their own assets. (Escamilla 1999) Obviously, all of these solutions have pros and cons, and it is not clear which solution is best, if any. It is clear, however, that the program must be reorganized if it is to last.Supporters of Social Security claim that it is a stable program and that no one should have fear that it will not pay individuals what it has promised. Lawrence Mishel, Monique Morissey, and Harry C. Ballantyne of the Economic Policy Institute claim that “Social Security is on sound financial footing for years to come despite the Baby Boomer retirement and the worst economic downturn since the Great Depression.” (2010) However, they do admit to a need for “[fiscal] policies that would expand the covered workforce, reduce health care cost inflation, and promote broadly shared economic growth.” Likewise, Paul Starr claims that Social Security is “the single biggest source of income, the financial bedrock” for the elderly and that the Social Security program is completely stable. He is confident in the fact that the government, through Social Security, “must fulfill [its] obligations to the elderly no less than its debts to bondholders in Japan.” (2005) Then again, this fact is not so reassuring since the United States government has yet to pay off the bulk of its foreign debts. With the majority of Americans believing that Social Security is necessary and yet lacking trust in the program's future, it is clear that some sort of action needs to be taken to assure the future success of the Social Security program.
      
8. If Congress were trying to balance the Federal budget and cut spending, should they continue to fund the Social Security program?
1. If Congress were to attempt to balance the Federal budget and were seeking to cut spending, they should end funding of the Social Security program. Unless the program is completely reorganized, it will not last anyway. Any efforts to reconstruct the program would cost a lot, thus making any other spending cuts Congress made null. Therefore, the best thing Congress could do would be to leave Social Security to itself. The trust fund that the program has now would be sufficient to last for several more years, and by then, maybe Congress would have a cheaper or more stable form of economic security to offer Americans. If not, then people might have to return to the good old-fashioned forms of economic security -- assets, labor, family, and charity. Maybe people would have to get to know their neighbors again. Regardless, of what may happen when Social Security's trust fund runs out, continued Federal spending on the program is pointless unless Congress is willing to make the effort to revamp the whole program. That option, though, would contradict the whole purpose of budget balancing and cost cutting. In the end, the only option is for Congress to leave Social Security to itself for now and seek to come up with a cheaper and more stable form of economic security for the American public. 

References

Aldrich, Jonathan. "The Earnings Replacement Rate of Old-Age Benefits in Twelve Countries, 1969- 80."  Social Security Association. Accessed November 6, 2012. http://www.socialsecurity.gov/policy/docs/ssb/v45n11/v45n11p3.pdf.

Austin, D. Andrew, and Mindy R. Levit. "Mandatory Spending Since 1962." Congressional Research Service. Accessed November 6, 2012. http://www.senate.gov/CRSReports/

crs-publish.cfm?pid='0E%2C*P%3C%5B%3C%23P++%0A.

Escamilla, Javier. "The Social Security Dilemma." Stanford University. Accessed November 4, 2012. http://www.stanford.edu/class/e297c/poverty_prejudice/soc_sec/hsocialsec.htm.

Granderson, LZ. "Social Security -- Are You Kidding Me?." CNN. Accessed November 6, 2012. http://edition.cnn.com/2011/09/20/opinion/granderson-social-security/index.html.

Hambor, John C. "Economic Policy, Intergenerational Equity, and the Social Security Trust Fund Buildup." Social Security Association. Accessed November 6, 2012. http://www.ssa.gov/policy/docs/ssb/v50n10/v50n10p13.pdf.

"Historical Background and Development of Social Security." Social Security Online. Accessed November 4, 2012. http://www.ssa.gov/history/briefhistory3.html.

Mishel, Lawrence, Monique Morissey, and Harry C. Ballantyne. "Social Security and the Federal Deficit." Economic Policy Institute . Accessed November 4, 2012. http://www.epi.org/publication/social_security_and_the_federal_deficit/.

Pear, Robert. "Social Security's Financial Health Worsens." The New York Times. Accessed November 4, 2012. http://www.nytimes.com/2012/04/24/us/politics/

financial-outlook-dims-for-social-security.html.

Sidor, Gary. "Social Security: Brief Facts and Statistics." CRS Web. Accessed November 4, 2012. http://fpc.state.gov/documents/organization/45222.pdf.

"Social Security and Medicare Tax Rates." Social Security Online. Accessed November 5, 2012. http://www.ssa.gov/oact/progdata/taxRates.html.

"Social Security Law: An Overview." Legal Information Institute. Accessed November 4, 2012. http://www.law.cornell.edu/wex/social_security?quicktabs_3=1#quicktabs-3.

"Social Security Reform." United States Government Accountability Office. Accessed November 6, 2012. http://www.gao.gov/new.items/d05193sp.pdf.

Span, Paula. "Social Security and Younger Americans." The New York Times. Accessed November 4, 2012. http://newoldage.blogs.nytimes.com/2010/08/25/social-security-and-younger-americans/.

Starr, Paul. "Why We Need Social Security." The American Prospect, Inc. Accessed November 4, 2012. http://www.princeton.edu/~starr/articles/articles05/Starr-SocSec-2-05.htm.