When Social Security was established in 1935, wages up to $3,000 were taxed at 2%, with the employee and employer each paying half. Over the years, both the rate of tax and the wage base have increased; currently, wages up to $90,000 are taxed at 12.4%. Social security has also been expanded to include self-employed individuals, who pay a tax equal to that paid by the employee plus that paid by the employer.
President George W. Bush has described Social security as a safety net that has a hole in it. The "hole" can be defined as the impending inability of Social security to fulfill its obligations because benefits paid will exceed both current tax receipts and the sizable reserves ($1.7 trillion at the end of 2004) that have been accumulated to date. President Bush proposes mending the hole by allowing workers to invest a portion of the payroll taxes that would otherwise be paid into the Social security Trust Fund into private accounts that would be invested in stocks and bonds. Unfortunately, diverting funds that would otherwise be paid into the Social security Trust Fund into private investments would increase, not decrease, the size of the hole in the safety net.
Fostering a system of such private accounts to augment Social security is the first step to doing away with Social security entirely. While Social security is not without its flaws, it has managed to provide a safety net for millions of Americans for 70 years and can continue to do so with modest adjustments. Starting down the road to complete privatization of Social security is tantamount to throwing out the baby with the bathwater.
Keeping Social security solvent requires that the Trust Fund receive funds at least equal to the benefits it disburses. While President Bush has repeatedly refused to consider an increase in the payroll tax rate, there have been indications that raising the $90,000 income cap on which the tax is levied might be politically palatable. Increasing that base, which has been increased every year since 1973, would affect only those wage earners and self-employed individuals in upper income brackets. For example, increasing the income cap from $90,000 to $100,000 would cost a wage earner who earns $100,000 or more $765 and a self-employed individual $1,530.
The age at which wage earners can begin receiving Social security retirement benefits has been fixed at 65 since 1935. That age is now scheduled to rise to 67. Life expectancy has increased from 61.7 years in 1935 to 77.3 years in 2004. As a result, many more Americans are eligible to draw Social security benefits. Greater life expectancy has increased work-life expectancy as well, because Americans tend to retire much later than was the case in 1935. …