Social Security Reform - March 2005

Our society’s current discussion about the future of Social Security is, I believe, really an underlying debate about more than Social Security itself. We are again evaluating the proper roles of the federal government and self reliance in our lives. When President Franklin Roosevelt introduced the Social Security Act in 1935 as part of his New Deal, he put forth his vision of the need for cradle-to-grave involvement of the federal government throughout our lives. Seven decades later, that role continues to be a wedge issue in most elections.

I believe self reliance should be the most important source of our personal welfare with family support as its primary backup. In my opinion, government assistance should only be available as a true safety net and not as an entitlement that we plan our lives around. That said, I believe the Social Security System is in its current financial state only because politicians expanded it beyond its original role as a needed safety net for the poor retiree. In 1937, they began positioning it as a major part of most citizens’ retirement plans by enacting the Federal Insurance Contribution Act and its 2% payroll tax. Today that tax is nearly 13%. When the FICA tax was introduced, there were nearly 40 workers paying that tax to support 1 retiree. With far more workers than retirees, the Social Security Administration was able to put aside a portion of the tax into a so-called trust fund for future needs.

Today approximately 14 workers pay the FICA tax to support each retiree. In a few decades, projections are that only 2 workers will be paying FICA taxes to support each retiree. In 1997, President Clinton appointed a Social Security Advisory Panel which concluded that the FICA tax would have to be raised by 50% at that time in order to provide actuarially sound funding for projected future benefit levels. Otherwise, they felt the trust fund would be exhausted by 2029. In the seven years since their recommendation, nothing has been done to address the issue while our economy went through a painful recession which reduced FICA tax contributions and further endangered the trust fund, and the number of retirees continued to explode.

What can be done now to give Social Security the financial security it needs to continue as a worthy government program for the future? I believe Social Security needs to be properly repositioned as the safety net program it should have been. Thus I believe that, rather than fully paying social security benefits to all retirees, those benefits should only be fully paid to those who financially need it. Do the likes of Bill Gates, Warren Buffett, or the tens of thousands of affluent retirees really need the full safety net of Social Security? Immediately imposing a sliding scale benefit would not be fair to those current and near retirees who, although not necessarily needing Social Security, paid their FICA taxes over the years expecting to receive benefits when they retired.

I will leave it up to actuarial experts, Social Security Trustees, and Congress to determine which retirement age group should be the first to have their benefits means-tested although I would suggest that those age 49 or younger still have plenty of time to adjust their retirement planning to a lowered social security benefit based on their expected financial well being at retirement. As a 46 year old, I am prepared to refocus my retirement plans accordingly. Frankly, I have never counted on Social Security benefits when I plan my retirement. Rather, my wife and I have always made sure that putting money into our retirement accounts was more important than buying new cars, eating out regularly at fine restaurants, or taking expensive vacations. We look forward to those pleasures of life when we retire in the years to come.

By enacting a means test for Social Security benefits, I believe that there will be no need to increase the onerous FICA tax beyond its current 12.6%. In fact, the rate should be reduced to provide my generation and those that follow with the extra funds to plan for their own retirements knowing Social Security will be means tested. Much has been said recently about allowing younger workers to personally invest a portion of their FICA taxes. President Bush wants to codify that self reliance by enabling workers to invest a portion of their FICA taxes.

Better yet, why do we need government permission to invest a portion of our own taxes? Simply lower the tax rate and let us invest our increased “pre-tax” earnings to fund our IRAs, 401Ks and company retirement plans. Lastly, I am vehemently against proposals to increase the taxable FICA wage to $ 200,000 from $ 90,000 as a source for additional Social Security funding. The resulting $ 13,860 in extra annual FICA taxes would be better spent by each individual in their own retirement plans so they, too, don’t depend on Social Security benefits when they retire.