Does Social Security Need A Lifeline?

by Edith T. Carper

Social Security is not looking very secure these days. As it now stands (or reads), the Social Security program will be able to pay full benefits until 2042. At that point, the trust funds will run out of cash but — according to some analysts — incoming tax revenue could cover more than 70 percent of the benefits promised.

In late March, two members of Congress, Sen. Craig Thomas (R-Wyo.), and Rep. Sam Johnson (R-Texas), announced their sponsorship of legislation to encourage Americans to save money to pay their bills after retirement. At a news conference on 31 March they urged Americans to save. "Only in America is a penny earned — a penny taxed," they said. "It’s time we simplify the savings process and encourage people to save. This bill is a step in the right direction."

In both the House and Senate, members are raising questions. Sen. Lindsey Graham (R-S.C.) is an advocate of individual accounts, calling them the only viable alternative to raising taxes or cutting benefits. Sen. Blanche Lincoln (D-Ark.), however, calls any form of privatization "dangerous and risky."

Peter Orszag of the Brookings Institute and Peter Diamond of the Massachusetts Institute of Technology, two economists from the academic world, are advocating a plan that achieves solvency — not via individual accounts but by using gradual increases in payroll taxes over the next 50 years and modest benefit cuts. They say their approach will not require the use of any general revenue from the U.S. treasury.

Rep. Johnson amplified some of the provisions of the bill he is sponsoring. Participants in the plan may contribute up to $5,000 a year and withdraw money at any time without a penalty fee. Under the Lifetime Savings Accounts Act of 2004 (H.R. 4078), contributions of up to $5,000, would not be tax deductible, but earnings would accumulate tax-free and withdrawals would not be taxed. Participants could also convert existing education accounts into new lifetime savings accounts.

Sen. Thomas characterized the proposal as a simple savings measure, explaining that, "Individuals, not the government, determine when and for what purpose distributions occur." Everyone agrees, he continued, "that … U.S. tax is too complex especially in the area of retirement plans. Congress must do a better job and make a renewed commitment to simplify the tax code and make it easier for people to set aside more of their hard-earned money."

On 30 March, Rep. Nick Smith, R-Mich., told members of the House of "the predicament" we face with Social Security and Medicare. He noted that the prior week actuaries of the Social Security Administration and Medicare went public about it. He used a pie chart to demonstrate the points he wished to make. Social Security — the largest budget item — is the largest budget expenditure — 21 percent of the budget, which compares to 20 percent for defense.

Mr. Smith said: "The system is stretched to its limit in Social Security. There are 78 million baby boomers that will begin retiring in 2008. Social Security spending exceeds revenues in 2017 and Social Security trust funds go broke in 2037." He wrapped up his cheerless warning with the announcement that Social Security insolvency looms and that the system "will not meet the challenge of demographic change."

The White House response to the problem is contained in the FY 2005 budget. That document proposes creation of Lifetime Savings Accounts that could be used for any type of saving and from which withdrawals could be made at any time. In addition, several kinds of employer-sponsored retirement plans would be consolidated beginning in 2005 into Employment Retirement Savings Accounts.

The American Association of Retired Persons (AARP) headlines the continuing discussion as "Social Security: Déjà vu Again?"

 

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Edith T. Carper is a special correspondent to IEEE-USA Today's Engineer.