Social Security: The Past, the Present, and Options for Reform
Anders, Susan B., Hulse, David S., The CPA Journal
Social Security is one of the most popular, broadly subscribed, and positively perceived federal government programs. The system plays an important role in the American economy, and it functions as both a retirement savings plan and a redistribution of wealth to reduce poverty among the elderly. For nearly three-quarters of a century, it has provided many benefits to individuals and to society. However, it also suffers from serious funding problems, is quite complicated, and is not well understood by the American public. For example, the Employee Benefit Research Institute's (EBRI; www.ebri.org) 2005 annual retirement confidence survey indicates that 68% of current workers are skeptical about receiving benefits at least equal to that of today's retirees.
Social Security currently provides a substantial portion of retirement security for the majority of elderly persons in the United States. According to the Congressional Research Service (CRS; Report 94-27, digital.library.unt.edu/govdocs/crs), approximately 50% of recipients have household incomes from all sources, including Social Security, of $25,000 or less. For more than one-quarter of recipients, Social Security provides more than 90% of their retirement income.
Private pension coverage has increased since the inception of Social Security, and Social Security Administration (SSA) statistics indicate that in 2002, 41% of Americans aged 65 or older received retirement benefits from sources other than Social security. According to the EBRI survey, however, 18% of workers whose employers offer a retirement savings plan don't participate, and less than 40% of workers have an individual retirement account (IRA). Only 69% of current retirees and 62% of current workers report saving at all for retirement, and fewer than half of those respondents have saved more than $25,000 on their own.
The original designers of the Social Security system were focused on ameliorating the desperate economic conditions faced by older Americans in the early 1930s. When the Social Security Act of 1935 first became law, the U.S. unemployment rate had reached 20%. The 1935 Act provided unemployment insurance and welfare programs, in addition to old-age pensions. In fact, the pension coverage was a relatively minor aspect of the original Social Security plan (Henry J. Aaron and Robert D. Reischauer, Countdown to Reform: The Great Social Security Debate, the Century Foundation Press, 1998), although it has since become the program's major focus. According to the AICPA's 2005 report Understanding Social security: The Issues and Alternatives (second edition), Social Security was an important factor in reducing the poverty rate among the elderly from 35% in 1959 to 10% in 2003, the lowest of any adult group. The median net worth of Americans age 65 or older was twice that for the entire population, according to the 2000 Census (Shawna Orzechowski and Peter Sepiella, Net Worth and Asset Ownership of Households: 1998 and 2000, Current Population Reports P70-88, 2003, www.census.gov/prod/2003pubs/p70-88.pdf.).
The pension aspect of the Social Security program was originally designed as a pre-payment plan, with benefits tied to contributions. Soon after inception, however, benefits were increased beyond originally envisioned levels, and the program became a "pay-as-you-go" system, with current workers' taxes supporting current retirees' benefits. Given a ratio of current workers to current retirees that declines over time, such a funding arrangement creates serious problems. Today, many experts expect that the Social Security system is going to run out of money in the future. The estimated deadlines vary depending on the assumptions made by the analysis, but it is widely expected that Social Security will not have the funds available to continue to provide expected benefits within about 25 years.
The poor economic outlook for Social Security is not a recent development, nor has it only recently been recognized. …