Personal retirement accounts may be the best solution for younger workers to benefit from their investments in the Social Security system, U.S. Rep. John Hostettler told attendees of the Clay County Town Hall Meeting Monday.
While the representative from Indiana's 8th Congressional District spoke about a number of topics, the pressing problem of Social Security reform topped the evening's agenda.
Debate and discussion of methods to strengthen the Social Security program to avoid growing deficits and eventual insolvency are on the horizon, the Congressman said.
Established by the Social Security Act of 1935, it was designed to provide old-age benefits to retired workers during the Great Depression. Dependents and survivors were added as beneficiaries in 1939, and disabled workers were added in 1956. In 1974, Supplemental Security Income (SSI) was established as a welfare program for low-income seniors and people with disabilities.
The number of workers has gradually dropped since the program's inception, and experts estimate that in 1935, 40 American workers were taxed per one Social Security beneficiary. By the 1950s, the number dropped to 16, and now there are three workers per recipient. When today's workers retire, the ratio will be two to one.
FICA taxes, the mandatory payroll tax paid by most workers and their employers, is the major source of funding for the Social Security program. The combined employer/worker tax rate was only 2 percent until 1949, and was only imposed on the first $3,000 of income.
A Vermont woman, the first person to receive monthly Social Security benefits in 1940, had paid only $24.75 in payroll taxes. By the time she died in 1975, she had collected $22,888.92 in benefits, earning a 47,000 percent return. Now Social Security collects 12.4 percent of the first $90,000 earned, even more when hospital insurance, or Medicare, is factored in, which is one-eighth of each paycheck with no exemptions or deductions. In 1939, the maximum Social Security benefit was $494 per year, which translated to $6,326 in 2001. But the maximum annual benefit at that time payable to a single participant retiring at age 65 was $18,456.
"These levels of taxation and benefits will be unsustainable as the baby boomers begin to retire in just a few years," Hostettler said.
At the end of 2002, there were 46.4 million Social Security recipients, and from 2000 to 2025, the number of people age 65 and older is predicted to grow by 76 percent, while the number of workers who support the system will grow by a mere 16 percent. By 2031, there will be almost twice as many older Americans. In 2020, the government will start paying out more in benefits than it collects in payroll taxes, with shortfalls growing by the year. By 2027, an additional $200 billion will be necessary to keep the system afloat. Unless action is taken to remedy the situation, when workers in their mid-20s retire in 2052, the system will be bankrupt. The cost of doing nothing to fix the system is estimated at $10.4 trillion, according to the Social Security Trustees.
"To put that incomprehensible number into perspective, $10.4 trillion is almost twice the combined wages and salaries of every working American in 2004," Hostettler said.
The current system won't be able to afford the scheduled benefits without enormous payroll tax increases or huge benefit cuts. But it is also important to remember that Social Security was never intended to be a person's sole source of retirement funding. It is an insurance system ensuring a minimum level of retirement income security for all Americans who survive to retirement.
Hostettler said that according to the Heritage Foundation, a married, white, dual-income couple born in 1970 and living in Indiana's 8th District can expect a rate of return of 1.49 percent. The worst rate of return in investments for a 20-year span is 3.36 percent, between 1929 and 1948, which included the Great Depression.
"In other words, the worst market returns of the 20th century exceeded the current return under Social Security," he said.
In 1935, President Franklin D. Roosevelt said the future of Social Security would rely on compulsory contributory annuities, which would eventually establish a self-supporting system for those who were young at the time as well as for future generations of Americans. Allowing young-er workers to put part of their payroll taxes into personal retirement accounts will provide them with a better deal, and the voluntary accounts would be a conservative mix of bond and stock funds, which would be able to earn a higher rate of return than the current system's provisions, FDR said.
Now federal employees can invest a portion of their paychecks in a program that is similar to the personal retirement account idea. The program is known as the Thrift Savings Plan. Federal Reserve Chairman Alan Greenspan also supports the creation of personal accounts.
"If this option is available to employees of the federal government, there's no reason to deny it to all other working Americans," Hostettler said.
While the collapse of the Social Security system is not an immediate threat, the Congressman thinks it would be foolish to delay reforms, and compared the situation to the Asian tsunami and evidence of an impending disaster. While a tsunami doesn't really affect ships on its surface, the damage isn't apparent until it reaches a shore farther away.
"The evidence of the Social Security problem is clear, even if we are not yet feeling its full effects. If we look forward and take appropriate action, we can avert an economic catastrophe," he said. "If we delay, hoping the problem will go away, we simply invite disaster."