Insecure Social Security

by Edith T. Carper

Social Security is not looking terribly secure these days. As the Act now stands, Social Security will be able to pay full benefits until 2042. At that point, the trust funds will have run out of cash, but according to some analysts, incoming tax revenue could cover 70 percent of the benefits promised.

At a 31 March news conference, 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. "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."

Rep. Johnson amplified some of the provisions of the bill, saying that participants may contribute up to $5,000 a year and withdraw money at any time without penalty. Under the lifetime Savings America Act (HR 4078), contributions of up to $5,000 would 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. "Individuals — not the government — determine when and for what purpose distributions occur." He said everyone agrees 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."

Members of Congress in both the House and Senate 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."

On 30 March, Rep. Nick Smith (R-Mich.), told members about the House of "the predicament" we face with Social Security and Medicare. He noted that the prior week, actuaries for the Social Security Administration and Medicare went public with the situation we face with these programs, using a pie chart to illustrate his point.

Social Security, the largest budget expenditure, represents 21 percent of the budget. "That compares to 20 percent for defense," he said. "The system is stretched to its limit in Social Security. There are 78 million baby boomers who will begin retiring in 2008. Social Security spending exceeds revenues in 2017, and trust funds go broke in 2037." He wrapped up his cheerless warning with the announcement that the system "will not meet the challenge of demographic change."

Economists Peter Orszag of the Brookings Institute and Peter Diamond of the Massachusetts Institute of Technology are advocating a plan that achieves solvency by using gradual increases in payroll taxes over the next 50 years, along with modest benefit cuts, rather than achieving solvency with individual accounts. They say their approach will not require the use of any general revenue from the U.S. Treasury.

Meanwhile, the White House response is contained in the FY 2005 budget, which 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 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, and can be reached at todaysengineer@ieee.org.