Social Security - Part 1: Background

For some time, Crabby Old Lady has been researching Social Security and the coming push to privatize that federal program. In this series – to be occasionally published until the privatization question is resolved – Crabby will explain what the Bush administration is proposing, the arguments pro and con, other worthwhile solutions and, of course, her position.

Any readers young enough to think Social Security benefits are too far in their future to put serious thought to yet, think again. It is younger folks, under 55, on whom this proposal will have the most urgent impact, dramatically affecting the circumstances of their old age, and requiring immediate decisions should privatization come to pass.

Any younger readers who already believe the propaganda that Social Security won’t be there when they get old, again think again – it’s just that: propaganda. Social Security needs some fixing, but nothing as damaging as privatization.

Crabby knows this stuff can be dense going, but she's done the homework for you and she will make it a snap for you to ace the quiz.

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Shortly after his re-election on 2 November, President Bush announced that privatization of Social Security is a “top priority” for his second term. This is as monumental a shift in policy and the overall economics of the United States as was President Clinton’s attempt to remake the healthcare system during his first term and as was Social Security’s creation. One of those initiatives failed and the other succeeded - perhaps beyond President Roosevelt’s wildest dreams for it.

Snapshot of the Creation of Social Security
In the days before Social Security, almost no workers were covered by employer pension plans and half the elderly population of the nation had insufficient income to support themselves. To compound this situation, the stock market crash of 1929 wiped out the savings of millions of Americans - rich, poor and in-between - and marked the beginning of the Great Depression that would last for a decade. At its highest level in 1933, unemployment climbed to 25 percent.

America believed it needed a change in leadership and in 1932, Franklin D. Roosevelt defeated incumbent President Herbert Hoover in a landslide. At his inauguration in March 1933, President Roosevelt said, "I pledge you, I pledge myself, a new deal for the American people." And he delivered. Among the many New Deal programs designed to raise the United States out of the Depression was the Social Security Act. When he signed it into law on 14 August 1935, President Roosevelt said:

"We can never insure one-hundred percent of the population against one-hundred percent of the hazards and vicissitudes of life. But we have tried to frame a law which will give some measure of protection to the average citizen and to his family against…poverty-ridden old age.”

It worked, and it continues to work now nearly 70 years later. Social Security is the most popular and successful program instituted by the U.S. government in the history of the nation.

Nobody ever got rich from Social Security nor is that its goal. But, according to economist Jane Bryant Quinn, “it single-handedly keeps almost 40 percent of the elderly out of poverty, and saves tens of thousands of them from having to depend on their children for support.”

How Social Security Works: Collection of Funds
Elegant in its simplicity, the basics of Social Security are not difficult to understand, but pay attention. Crabby says you’re going to need this information through the coming months as the Bush administration tries to win friends and influence people to its position in the controversial battle privatization is certain to become.

Social Security is a pay-as-you-go system: the contributions of today’s workers pay the benefits of today’s retirees. Through a payroll tax, 6.2 percent of every worker’s salary goes into the system, deducted from each paycheck up to a current salary limit of $87,900. ($90,000 in 2005.) This contribution is matched by an equal 6.2 percent from workers’ employers.

Right now, and for some years to come, these payroll taxes produce a surplus. The extra money goes into the Social Security Trust Fund:

“The excess is borrowed by the U.S. Treasury, which in turn issues special-issue Treasury bonds to Social Security. These bonds totaled $1.5 trillion at the beginning of 2004, and Social Security receives more than $80 billion annually in interest from them.”

- www.socialsecurity.gov

How Social Security Works: Payout of Funds
When a person begins to collect Social Security benefits, the monthly payment is calculated on the amount of lifetime contributions and age at retirement. The program allows workers to begin collecting as early as age 62, though benefits are then permanently reduced. Standard retirement age for full benefits is 65 for those born before 1938. It is being gradually increased for those born later. For example, Crabby Old Lady, born in 1941, is not eligible for full benefits until eight months after her 65th birthday. If a worker delays collecting Social Security benefits beyond the official retirement age, payments are correspondingly increased.

The Social Security Administration website will give you a rough estimate of the monthly payments you will receive upon retirement with their Quick Calculator.

Social Security benefits are tax-free as long as it is your only income or if you earn up to $25,000 per year. A single recipient earning between $25,000 and $34,000 a year is required to pay taxes on up to 50 percent of the Social Security benefit. And those who earn more than $34,000 a year pay taxes on up to 85 percent of the benefit. There is more information on Social Security and taxes here.

Whether you live to be 75 or 105, Social Security is a guaranteed lifetime benefit, increased over the years to account for inflation. In 2005, for example, the Cost of Living Adjustment (COLA), based on the Consumer Price Index, will be 2.7 percent.

Why the Privatization Initiative and Why Now?
Privatization of Social Security is not a new proposal. The idea has been bandied about at least since the 1980s. The reason is that the demographics of the United States (and the entire world) are changing. Thanks to the baby boomer bubble and decreasing birthrates, the population is aging and in the future, there will be more people collecting Social Security than paying into it. This will create a deficit in Social Security that must be addressed now to insure future benefit payments for everyone as promised by the U.S. government.

Some people, currently led by President Bush, believe privatization is the way to do that. Others, who rarely get as much publicity as the administration, have different solutions. Crabby Old Lady will explain the various plans, their impact and their political angles (you knew there are political angles, right?) of it all in future installments.

See? That wasn’t so hard, was it? Crabby promises that no matter how arcane details of the Social Security privatization issue become, she’ll make it easy for you to understand.

...to be continued...

Social Security Privatization Series Index