When We're 65

Social Security, the program for the elderly enacted during the Great Depression, is widely regarded as America's most popular and most effective social program, having effectively cut the elderly poverty rate by two-thirds over the past three decades. All other things being equal, if it were not for Social Security, more than half of Americans over 65 would be living below the poverty line today.

Despite its continued popularity and success, however, Social Security currently faces two challenges. The first is a long-term financing imbalance; the second, precipitated by the first, is a crisis of confidence whereby more young Americans believe in UFOs than believe that Social Security will exist when they retire.

In his State of the Union message 10 days ago, President Clinton made it clear that his first domestic priority is ensuring Social Security's financing and restoring public confidence in the system. "Let us make this commitment: Social Security first," he said. Clinton set the stage for a major debate on the future of Social Security, beginning with regional public forums over the next year and culminating in the crafting of bi-partisan reform legislation next January.

There is a lot at stake in the coming debate (your taxes and your future benefits among other things), yet few Americans understand how Social Security works and fewer understand the nature of the current problem. Here is a ten-point primer that will help you navigate the upcoming debate on the system, its problems and possible solutions:

1. Social Security is more than a pension system. In addition to paying benefits to retirees and their spouses, Social Security pays benefits to survivors of deceased workers and to disabled workers. All in all, benefits are paid to about 44 million Americans each year.

2. At the age of 65, workers and their spouses are eligible for monthly benefits. These benefits are based on a worker's average monthly wages. A worker with higher average lifetime earnings receives larger monthly benefits. However, Social Security is redistributive, so a low-wage worker gets proportionally more out of the system.

3. Social Security is a pay-as you-go pension system. Today's workers pay money into the system and that money is paid out to current retirees and other beneficiaries.

4. The American government does or will take money from your paycheck in essentially two different ways. One way is through an income tax which is used for general expenditures like the military, education and highways. The other is through the Federal Insurance Contribution Act (FICA) tax, which is used to fund Social Security and Medicare. Employers and employees each pay 7.65 percent of an employee's earnings in FICA taxes. In other words, if you make $10,000 a year, your employer pays $765 in FICA taxes and you pay $765 in FICA taxes. FICA taxes are 7.65 percent for everyone making under $65,401 a year. Income over $65,400 is only taxed at 1.45 percent, the portion of the tax that is for Medicare.

5. The money that Social Security takes in through FICA taxes exceeds what it pays out in benefits. This year alone, Social Security's surplus will be about $100 billion. That money is held in a trust fund; the value of that fund now exceeds $500 billion. However, because the government spends more on other programs that it takes in, it "borrows" from the Social Security trust fund. For example, this year the government will spend about $50 billion more than it has, but it will borrow Social Security's $100 billion surplus.

6. So when Clinton says that he will put the $50 billion surplus towards Social Security he is just giving the program some of its money back (he is giving back half of what they borrowed this year alone).

7. Changing demographics have created a long-term financing imbalance. Since the 1930s, the ratio of workers to retirees has been steadily decreasing. In 1960 there were 5 workers paying into the system to support each retire. But when Baby Boomers retire, that proportion will be cut by more than half. This means that the system will be taking in less money while it will need to pay more out.

8. In 2020, according to moderate estimates, FICA taxes will not cover expected outlays, and Social Security will have to dip into its trust fund (meaning that the rest of the government will have to pay Social Security back). By about 2029, that fund will be depleted and Social Security will only have the money to pay out 75 percent of expected benefits. This is the core of the Social Security problem.

It is important to remember however that these are just estimates. If the economy continues to grow at the rate it has for the past several years, the problem will disappear. However, if the economy takes a nosedive, the problem will get worse.

9. Fans of the current system wish to solve this imbalance by "tinkering." For example, some combination of benefit cuts, modest tax increases, a change in the investment portfolio of the trust fund and an increase in the retirement age could shore the system up for the next 75 years. Proponents ask why we should radically reform a program that has been so effective for so long. Opponents say that "tinkering" will not be a permanent fix and that there may be a cheaper way to get greater benefits.

10. Radically opposed to the tinkerers are the privatizers. There is a wide range of privatization options but essentially privatization plans propose that a portion (or all) of your pay-roll taxes get diverted into some sort of individual account. You would then have limited control over how that account is invested and what kinds of benefits you would receive.

Proponents of this plan point to the magic of compound interest and argue that individuals will have more freedom over their money and will have the opportunity to get higher benefits. Opponents claim that pensions are too risky to entrust to the private market, and that private plans undermine the social solidarity of a public program. Furthermore, they point out that privatization plans have high "transition costs." Because current workers provide benefits for current retirees, if workers divert funds into their own accounts, there would not be enough money for current retirees. Consequently, all privatization plans include hefty tax increases for as many as 75 years.

College students, especially elite college students, lie at the heart of this debate for various reasons. Proof of this is that earlier this year, a leading proponent of privatization paid to have 400,000 pamphlets stuffed into newspapers on America's most prominent college campuses.

Privatizers know what you should know, that as students at a top university, you can probably do much better under a private system than a pay-as-you-go system. No one disputes that. A private system would certainly benefit high-wage workers because they can afford to take the market risk that yields high returns.

The question is, however, how will everyone else fare, and is that important? Privatization pushers say that even the poor will be better off under a private system. Opponents like the AFLCIO say a private system would not only leave low-wage workers unprotected, but would violate a basic principle of the welfare state, releasing the wealthy from any obligation help support lower-wage workers.

Like anything else, there are pros and cons to both privatization and to tinkering. What troubles me, and what should trouble you, is the extent to which people are trying to influence-us by pointing out how much we have to gain from something without telling us how much everyone else might lose. Social Security keeps over 40 percent of the elderly above the poverty line because we pay a little more.

Will privatization protect disabled workers, provide a minimum level of protection for low income workers, ensure benefits for non-working spouses or provide protection from market fluctuations? And what kind of taxes will be necessary to fund the transition? These are the kinds of questions we must ask our-selves before we can make an informed and sensible choice.

Conley Rollins '98, a social studies concentrator, is writing a senior thesis on the future of social security. He lives in Lowell House.