Social Security

A HISTORY OF SOCIAL SECURITY

One of the earliest economic security proposals came from Thomas Paine, the incendiary and prolific pamphleteer and vanguard think-tank for both the American Independence and the French Revolution, in his final piece “Agrarian Justice.” He called for a special fund that collects 10% inheritance tax and pay to every youth £15 upon age 21 for a fresh start in life and provide £10 annually to the above 50 and the “blind and lame.” Despite speaking little French, he was elected to the French National Convention in 1792.

There had been puny, small-scale attempts for old-age social insurance in various forms, such as the first corporate pension established in 1882 by Alfred Dolge company funded by $1 dollar from salary. The company went out of business a few years later.

Society wide efforts hadn’t been drawn to public attention until the Great Depression, which spawned a series of radical shoot-outs. A noticeable one was Chuck Coughlin, a priest and a radio preacher for Union for Social Justice movement, whose radical views was later censured by the Catholic Church. In his hey day he had 40 million audience (1/3 of the pop), a lion share greater than that of Howard Stern, Rush Limbaugh, Paul Harvey and Larry King combined today.
In August 1935, FDR signed into law the Social Security Act, creating a social insurance program that would pay 65+ a continuing income after retirement. From FDR on, nearly every president earned some bragging rights by tinkering the Social Security, e.g., Johnson’s Medicare Bill and Nixon’s COLA (cost of living adjustment).

STATUS QUO AND FORECAST

According to 2008 OASDI Trustees Report:

At the end of 2007, 163 million were covered and almost 50 million (including 34 million retired workers and their dependents) were receiving benefits.
OASDI (Old Age and Survivors Insurance Fund + Disability Insurance Trust Fund) held $2.2 trillion of special issue U.S. Treasury securities, $585 bil¬lion (4.3% of GDP) paid and $785 billion received

OASDI will exhaust in 2041 due to demographic change, under-funded by $4.3 trillion in present value over the 75-year period, or 1.7% of taxable payroll; OASDI cost will rise to 6.0% of GDP in 2030, and then decline to 5.8% in 2082.

SOCIAL SECURITY VIEWPOINTS

Why is there Social Security?

Social Security is a form of forced savings – see it as a saving account established by the federal government that mandates 6.2% from your salary (and another 6.2% from your employer) each month, paying certain amount of interest each year until you retire at 65.

A few may believe that they can best it by managing the money on their own, but the fundamental different is that Social Security first of all force you to save so that you won’t retire with an empty pocket, which some will probably do without Social Security. Secondly, Social Security is a type of defined contribution vouched by the federal government. The risk level is lowest. Also, the bent points in the benefit formulator tilt toward the low income to insure the economic safety for everyone, although on the other hand some economists believe it redistributes to the wealthy owing to the wage base ceiling.

Will Social Security go bankrupt?

Social Security is $4.3 trillion short for the following ¾ century, because of the aging population and the pay-go system, in which the receipts from the current generation pay for the obligation to the retired.

If the federal government holds onto it, the question whether Social Security would go bust is the same as whether the federal government would – Nobody seems to worry about the federal debt of $9 trillion. But certain measures have to be taken to balance the OASDI, the Social Security trust fund, such as a payroll tax hike, work year protraction or a benefit cut. Though the $4.3 trillion seems creepy, based on current forecast, a 1.7% payroll increase will do it.

Should Social Security be (partially) privatized?

It sounds more ideological. In practice though, either Social Security is gov- or private- run, the retirement needs don’t diminish. So it is a question of who would manage the needs more effectively. One thing is certain: a public system roots out unnecessary risks and potential individual irresponsibility. If privatization is under way, it would be the largest asset reallocation ever and it could be fun.