The best answer to reforming the Social Security system is to wean it off the government dole by allowing people to set aside at least some portion of their payroll taxes in personal investment accounts for their own retirement. This has been done with considerable success in Chile, where the CATO Institute reported that during the first 22 years of their program, the rate of return “was an astonishing 10 percent above inflation.” (Economist Estelle James Examines Chile’s Pension System, February 25, 2005).

Private accounts have two big advantages:

-Individual accounts will belong to the people whose earnings are taxed to make contributions for their own retirement. Thus, any money remaining in their personal retirement accounts can be passed on to their heirs, instead of reverting to the government when they die. It’s a choice between creating and/or increasing workers’ personal estates vs a dead loss.

-The rate of return on investment in individual Social Security accounts will be much greater than the one to two percent average annual yield that has historically been realized, which will ultimately translate into higher retirement income for participants.

A 2001 report by the CATO Institute, titled, America’s Social Security System: The Case for Privatizing, noted: “A poll…..showed that 69 percent of Americans favored switching from the pay-as-you-go system to a fully funded, individually capitalized system. Only 11 percent said they opposed the idea. Interestingly, the major reason people cited for wanting to switch to a private system was not the higher rate of return they surely would capture under such a system…but they pointed rather to the fact that they, and not the government, would be in control of their retirement income.”

The CATO Institute also reported that, by a margin of two -to-one, America’s Generation Xers “think they are more likely to encounter UFO in their lifetime than they are to ever receive a single Social Security check. Even more remarkable, perhaps, was a poll taken….by White House pollster Mark Penn for the Democratic Leadership Council, (which) found that 73 percent of Democrats favor being allowed to invest some or all their payroll tax in private accounts.”

Watching the endless analysis and debate about the need for reforming our Social Security system and how it should be done is, as the saying goes, a little like watching sausage being made. Not a very pleasant or appetizing sight.

What’s especially troubling is how politicians continue to mislead the public on this issue and get away with it.

In 2009, Social Security had an unfunded liability of $17.5 trillion and is currently projected to begin spending more than it takes in by 2017.

The most recent Social Security Trustees’ report provides the following facts about the program, among others:

-It is the largest government program in the world and accounts for 23 percent of the federal budget.

-Nearly 80 percent of taxpayers pay more in Social Security taxes than they do federal income taxes.

-The Social Security program cannot be sustained as it is presently constituted and cannot pay future benefits without burying future generations in debt.

-By the time today’s 37-year-olds become eligible for Social Security their benefits will be reduced by 26 percent, unless the program is reformed.

-The Social Security Trust Fund has no investments or assets in it, other than IOUs from the federal government in the form of government bonds, that is, IOU’s from the federal government, which has already used the money to fund its deficit budgets.

© 2010 Harris R. Sherline, All Rights Reserved

Read more of Harris Sherline’s commentaries on his blog at www.opinionfest.com

Assumptions are not facts. They’re guesses. Sometimes right on, sometimes way off or somewhere between. But, when it comes to Social Security, regardless of the accuracy of the assumptions used in the various forecasts, the reality is that the system is going broke. The question is not “if” but “when.”

Start with the fact that the Social Security administration does not have any funds in trust or investment accounts, such as stocks, bonds, savings accounts. The entire system is actually a giant Ponzi-type pay-as-you-go scheme that takes the payroll taxes of those who are still working and distributes it to retirees. Individuals who hustle similar dishonest “investments” are sent directly to jail without passing “Go,” but it’s OK for Congress.

“Any surplus is not saved or invested for pensioners. Those funds are borrowed by the federal government to pay current operating expenses and replaced with government bonds…..the federal government lends itself the excess in return for an interest-paying bond, an IOU that it issues to itself……The funds are not invested for the benefit of present or future retirees.” (Source: Retiring With Dignity: Social Security vs. Private Markets, William G. Shipman, The CATO Project, August 14, 1995).

What a brilliant idea, having the government borrow money from itself and issue IOUs to itself, promising to pay it back later. But wait, doesn’t the money all come from the same pocket, the taxpayers, right? If you’re confused by this, don’t fret, you’re not alone. The entire setup is nothing more than a giant shell game: now you see the money, now you don’t, which shell is it under?

Our Social Security program has worked to this point because money has been coming in faster than it has been going out. But that’s about to end. Charles Krauthammer, writing in the Washington Post (2005), noted that in 2018 the “pay-as-you-go system starts paying out more (in Social Security benefits) than goes in (in payroll taxes)…But because the population is aging, in 13 years [now 9 years] the system begins to go into the red.” At that point, Social Security will only be able to pay 73% of “promised benefits” to retirees.

If you’re not yet convinced that Social Security is going broke, here are some stats worth considering (Source: Retiring With Dignity: Social Security vs. Private Markets, William G. Shipman, The CATO Project, August 14, 1995):

• In 1935, when the Social Security Act was adopted, life expectancy at birth was 64 years; in 1995 it was 75.8; today it’s over 78.
• The birth rate was 3.56 in 1950, 2.0 in 1995 and is currently something less than 2.0.
• There were 16 workers for every Social Security recipient in 1950; 3.3 in 1995, and the ratio has been projected at less than 2.0 in 2030.
• In 1937, the maximum Social Security Tax was $60 on $3,000 of income. Today, it’s $6,621 on $106,800 of income, over a 10,000% increase. (NOTE: Remember, the employer matches the employee’s contribution).

These numbers clearly demonstrate why Social Security is going under: people are living (read collecting benefits) longer, and there are fewer workers paying into the system to support each retiree. In about 20 years, less than two workers are expected to be paying into the system to support each beneficiary, compared to 16 in 1950.

It doesn’t take a math major or a Ph.d to recognize that the program can’t be sustained without making some drastic changes.

Furthermore, Social Security was not really intended to be a retirement program. The politicians who devised the program in 1935, including FDR, knew perfectly well at the time that most Americans wouldn’t live long enough to collect any benefits.

The United States is not alone in being confronted with the dilemma of a failing national pension system. It’s a universal problem, affecting all the European nations and Russia, among others.

One solution might be to drastically reduce benefits for all social security beneficiaries. How much no one knows, but it could easily be a third or more.

Another alternative is to increase the retirement age, which will slow the rate of outgo, although that will ultimately not be enough of a fix. Raising the age of eligibility (to 67) is already being phased in.

A third possibility is to raise taxes, dramatically. Hardly an attractive option.

Or, the government could borrow the money to cover the shortfall, which currently adds up to something in excess of $17.1 trillion, an astonishing unfunded liability.

Of course, the problem could be fixed by reducing other government spending. However, since the discretionary portion of the federal budget is relatively small, it would mean significant cuts in other expenditures, such as defense, education, highways, energy, welfare, or the host of so-called “entitlement” programs. Not very likely.

© 2009 Harris R. Sherline, All Rights Reserved

Read more of Harris Sherline’s commentaries on his blog at “www.opinionfest.com”