SOCIAL SECURITY

• To cut or not to cut, that is the key question

• First, we need to cover a few basic facts about Social Security

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KEY FACTS

1)Social Security Payments

We are addressing here only a small portion of the programs covered by the Social Security Act: the payments for retirement, survivor’s insurance and disability benefits, which is what most people think of as Social Security, and also briefly in #2 below, Supplemental Security Income (SSI).

Some of the other programs covered by the Social Security Act are Medicare (health insurance for the Aged and Disabled), Medicaid (Grants to states for Medical Assistance Programs) and SCHIP (State Children’s Health Insurance Program) which we may discuss in later blogs. For purposes of this Blog, when we say “Social Security”, we mean only payments for retirement, survivor’s insurance and disability benefits.

You have probably heard people claim that Social Security is a huge percent of our Federal budget and therefore we need to cut Social Security benefits. Indeed there has been a lot of media speculation that Obama’s Commission members are likely to recommend that the age for full retirement benefits be raised to 69 or 70.

The important fact to know about Social Security benefits is that they are funded from dedicated payroll taxes referred to as FICA (Federal Insurance Contributions Act) taxes. They are not paid from the general treasury. So, even though the amount of benefits paid annually is large (~$683 Billion....we got this figure by multiplying payments made in May, 2010 of $56.9 Billion, which we found on the Social Security website, by 12), these payments do not contribute to the deficit, with one exception.

The one exception came about as a result of the 1983 Commission led by Alan Greenspan that recommended dramatic changes to Social Security that were made into law during the Reagan Administration. These changes included taxing Social Security benefits and increasing the age at which a worker can retire with full retirement benefits. These changes brought in so much extra money, i.e. money over and above the benefits that were paid out by Social Security during the year (referred to as “surplus”), that Presidents such as Clinton and Bush took that money into the general treasury and used it to pay for wars, highways, etc. In return, Social Security got treasury securities (IOUs) which are now part of the National Debt, ~$2.5 Trillion, that the US Government has to pay interest on. Look for Obama’s Commission to recommend that this debt be wiped out and never repaid to Social Security. In fact, Alan Simpson, a former Senator from Wyoming and one of the Co-Chairman of Obama’s deficit commission, recently stated that the surplus was used for highways, and therefore everyone benefited so no one should expect it to be repaid.

Bottom line: It is only the Social Security “surplus” (which was turned into securities - or IOUs) and the interest paid on those securities that add to our Federal deficit.

2) Supplemental Security Insurance (SSI)

We mention SSI in passing because some people regard it as part of Social Security benefits. SSI payments are made to people who are very poor (low income with basically no assets) who are disabled or blind (their minor dependents are also eligible for SSI)

As of May, 2010, there were ~7.8 million people who participate in this program and get ~$50 Billion annually (we got this figure by taking the amount of payments made in May, 2010, $4.2 Billion, which we found on the Social Security website, and then multiplying that number by 12) The payments for SSI come out of the general treasury rather than from the FICA tax so these payments do contribute to the deficit.

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• So, back to the question of “to cut Social Security or not to cut”. As we alluded to above, many politicians say Social Security benefits need to be reduced to lessen the cost or even gotten rid of altogether

• Candidate Obama said Social Security should be “fixed” by lifting the cap (currently the cap is $106,800, the same as it was last year) The cap is the upper limit on which a worker’s Social Security tax may be imposed. The tax for Social Security on wages up to the cap is 6.2% which is paid by the employee, with the same amount paid by the employer to Social Security on behalf of that employee. If the cap were raised to $300,000, for example, people who earn between $106,800 and $300,000 or more in wages, would now be taxed at a rate of 6.2% for Social Security on that increased amount of wages, with any amount earned over $300,000 not being subject to the 6.2% tax. That approach taxes folks who would probably be able to more afford a tax increase than removing/delaying benefits to low and middle income Americans

• The question in our minds is, if Obama wanted to “fix” Social Security by raising the cap, why then did he appoint as Chairmen two people who, instead, have been (and still are) very vocal about making steep cuts or even ending Social Security completely; could it be that, given the bank bail-outs and huge stimulus plans during the Recession, President Obama feels that he has to make some high profile benefit cuts in order to avoid having the debt of the US downgraded and also to encourage foreigners to keep buying our debt {note: 40% of what we spend annually is funded by borrowing}. However, as we pointed out, Social Security payments do not add to the deficit because they are separately funded and therefore our 40% rate of borrowing is not lowered by cutting Social Security

• Let’s look at the two Co-Chairmen who Obama selected:

• Erskine Bowles, former Chief of Staff to President Clinton: In 1997, Bowles brokered a deal on behalf of President Clinton with Newt Gingrich, then the Speaker of the House, to dramatically cut Social Security. According to Steven Gillon, author of The Pact: Bill Clinton, Newt Gingrich and the Rivalry that Defined a Generation, (and summarized in an article by Jane Hamsher on Firedoglake.com, May 18, 2010), President Clinton wanted to fix social security for the long term even though there were huge surpluses coming in at the time. He had failed to do that in 1994 with the Danforth Commission because the 13 members were too divided and could not reach a consensus. Enter Erskine Bowles, a good negotiator and a conservative on economic matters who was able to get along with Gingrich. Secret meetings were held between Bowles, Gingrich and Clinton (and these talks also involved Bill Archer, a Republican from Texas who was Chairman of the House Ways and Means Committee). This effort culminated in a plan to raise the minimum age for Social Security benefits (currently, 62) and to lower the annual cost of living adjustment to slow down the increases in benefits that are provided to keep up with inflation
  
  Clinton was set to announce these drastic changes in Social Security and to set up a Commission to make cuts in Medicare when the Monica Lewinsky scandal erupted, which abruptly ended the “conspiracy” between Clinton and Gingrich- causing some to claim that Monica Lewinsky saved Social Security

• Alan Simpson, former Republican Senator from Wyoming, who had served on Clinton’s Danforth Commission referred to above: Simpson’s views on Social Security and Medicare are well known {cut, cut, cut --- or “get rid of the cancer”} which makes him a surprise choice for Chairman, unless of course President Obama shares Mr. Simpson’s views. We cannot refrain from noting that, while Mr. Simpson talks ill of “Geezers who refuse to cut Social Security”, he himself is a Geezer who takes generous pension money from Uncle Sam. Why shouldn’t we first eliminate Federal pensions and have politicians depend solely upon Social Security? We believe their rhetoric would change dramatically

• With so many other members of the Commission speaking out on the need to cut Social Security before they even sat down to work, one wonders whether the Obama Administration had worked out an agenda in advance {possibly with the Republicans} for what would be decided by the Commission: Witness public remarks of Alice Rivlin, Jeb Hensarling and Paul Ryan to name just a few of those on the Commission who believe drastic cuts in Social Security are required; and how is it that Peter Peterson, a Billionaire business man who served on Clinton’s Danforth Commission and who has lobbied Presidents to privatize Social Security has been invited to work closely with Obama’s Commission by providing research assistants and funding a recent teleconference held with 3,700 people across the country

• The Long Term Outlook for Social Security: Without changing anything, Social Security is forecast to be solvent until 2037 (this was recently moved up from 2041 due to the Great Recession); this is based upon very slow growth (less than 2%) in the US economy; if we can get our act together and focus on REALLY stimulating our economy, the long term outlook will be even better

• Younger Americans now believe that Social Security will not be there for them, so they are passive with respect to cuts being made. They need to realize that if they get energized NOW and write/call President Obama and their representatives in Congress, and spread the word to their friends to do the same, we stand a good chance to save Social Security for future generations

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• Instead of slashing Social Security (or Medicare), we should discontinue “entitlements” the US provides to multi-millionaire farmers, fossil fuel energy companies (oil, gas & coal) and other special interest groups including members of Congress (ie, let’s get rid of their pensions); Please remember that Social Security was already cut by a Commission in 1983 and cut back further by President Clinton when he pushed back the time when folks get paid by Social Security (see NY Times Article, April 1995, “Clinton Seeks to Streamline Social Security.”) And don’t forget that the surplus that our government borrowed from the Social Security trust fund will likely never be repaid. As discussed, WE NEED TO STAND FIRM AND WRITE/CALL OUR POLITICAL REPRESENTATIVES AND SAY THAT WE DO NOT WANT ANY FURTHER CUT BACKS OF SOCIAL SECURITY

• Footnote: In the interest of “completeness”, we should mention that there will be a shortfall in Social Security this year of $29Billion. Or, to say it another way, during fiscal 2010, more benefits will be paid out to workers than were received from the FICA tax because unemployment is so high and therefore payrolls are down. This “short fall” however, will be more than covered by the interest that the US treasury has to pay on the debt owed to Social Security for the “surplus”