Saving Social Security: The SSA’s Alternatives To Higher Taxes, Privatization

The Social Security system is approaching a budgetary crisis point. Political rhetoric aside, the Social Security Administration (SSA) states in its latest strategic plan that, without a fundamental change, by 2017 the amount of tax revenue collected will not cover the amount of benefits paid.

When that happens, the SSA will begin cashing in the bonds within its Trust Fund. These bonds—to quote the SSA, “backed by the full faith and credit of the United States government” —represent sufficient funds to keep benefits flowing until 2041; however, asking the U.S. Treasury for so much cash will put pressure on the federal budget long before that date.

According to the Cato Institute, 60% of U.S. citizens currently working believe they’ll never receive benefits before the SSA goes belly-up, and they could be right. After all, Social Security is not an insurance program but a pay-as-you-go tax that transfers money directly from the workers of today to the retirees of today, not to an investment program for the workers’ future benefits.

The leverage between generations becomes more highly geared each year. In 1945, 10 years after the SSA was established, there were 42 workers for each beneficiary; today, with longer life expectancies, improved healthcare and lower birth rates, there are 3.3. This situation is not unique to the U.S., and benefits concerns encompass the globe; the UK now has more pensioners than teenagers below the age of 16, and their Department for Work and Pensions is also seeking a long-term funding solution.

Former President Bill Clinton discussed three possible salvage operations: higher taxes, reduced benefits or privatization. Senator Hillary Clinton, during her run for the Democratic nomination, refused to place any of those alternatives on the “proverbial table.” Senator Barack Obama wants to remove the cap on payroll taxes, while Senator McCain favors personal retirement accounts.

Improving Efficiency

Meanwhile, the Social Security Administration is quietly pursuing another alternative.

Back in mid-June of 2008, with producer prices for finished food products soaring 9.8% in six months, businesses realized that not all of these increased costs could be passed along to customers (the Consumer Price Index for finished food products rose only 6.6% during the same timeframe). The search began for ways to trim costs. Airlines charged for refreshments and jettisoned heavy entertainment equipment to increase fuel mileage on long-distance flights.

Amid this corporate scramble, McDonald’s neither raised prices nor cut services. Instead, they concentrated on increasing efficiency through such means as conserving energy, utilizing new technologies and purchasing supplies through long-term contracts. Their hamburgers remained the same (for good or ill) and so did their prices, without shaving profit margins to the bone.

Can improved efficiency really help Social Security?

  • The U.S. Treasury in January announced a new program that issues Social Security benefits on prepaid debit cards. Rather than issuing, printing and mailing checks, a computer program simply recharges the card each month, with annual cost savings of up to $44 million.
  • In addition to the direct costs of benefits, there’s also the cost of customer service. To offset this, the SSA has expanded the range of services available online, reducing administrative costs—not to mention saving the beneficiary’s time and gasoline.
  • It’s a sad fact that disability benefits are sometimes paid to individuals who are no longer (or never truly were) disabled. To reduce such fraud, the SSA conducts periodic disability redetermination reviews, which save $10 in no-longer-paid benefits for every $1 spent to operate the program.

In other words, yes, although increased efficiency cannot cure the problem, it can reduce pressure on the system. This is part of the solution being contemplated in the UK, where the House of Commons is debating a bill to simplify regulations for private pension schemes.

Another potential solution, modeled on the Galveston County employees’ plan, charges a monthly premium of just over 12% of wages, roughly the same as Social Security withholding. This premium provides private disability, life and retirement insurance, invested in CDs and annuities and earning around 6–8% per year. Although this plan does not eliminate all risk from retirement investing, it does reduce it below that of the stock market while earning around three times as much as the SSA Trust Fund bonds.

Now that the U.S. Treasury owns 79.9% of America’s largest insurance company, AIG, perhaps this is a viable option for the rest of us, too.

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