Tuesday, April 10, 2012

Would FDR disapprove of today's social security system?

Most people think FDR was the father of our social security system and therefore thought it was a good idea.

Turns out that might not be the case. The retirement system he put in place was much different, at least initially. It was intended to be a system where workers paid and then got their contributions out later. Rather and an ongoing system where future workers paid the benefits of current retirees. According to financial writer Robert Samuelson:
Would Franklin Roosevelt approve of Social Security? The question seems absurd. After all, Social Security is considered the New Deal's signature achievement. It distributes nearly $800 billion a year to 56 million retirees, survivors and disabled beneficiaries. On average, retired workers and spouses receive $1,839 dollars a month -- money vital to the well-being of millions. Roosevelt would surely be proud of this, and yet he might also have reservations. Social Security has evolved into something he never intended and actively opposed...

When Roosevelt proposed Social Security in 1935, he envisioned a contributory pension plan. Workers' payroll taxes ("contributions") would be saved and used to pay their retirement benefits. Initially, before workers had time to pay into the system, there would be temporary subsidies. But Roosevelt rejected Social Security as a "pay-as-you-go" system that channeled the taxes of today's workers to pay today's retirees. That, he believed, would saddle future generations with huge debts -- or higher taxes -- as the number of retirees expanded.

Discovering that the original draft proposal wasn't a contributory pension, Roosevelt ordered it rewritten and complained to Frances Perkins, his labor secretary: "This is the same old dole under another name. It is almost dishonest to build up an accumulated deficit for the Congress ... to meet."
But things then changed in the 1940s and 1950s when politicians got ahold of it.
But Roosevelt's vision didn't prevail. In the 1940s and early 1950s, Congress gradually switched Social Security to a pay-as-you-go system. Interestingly, a coalition of liberals and conservatives pushed the change. Liberals wanted higher benefits, which -- with few retirees then -- existing taxes could support. Conservatives disliked the huge surpluses the government would accumulate under a contributory plan.

All this is well-told in Sylvester Schieber's "The Predictable Surprise: The Unraveling of the U.S. Retirement System." Schieber probably knows more about American retirement programs than anyone. He has advised the Social Security system, consulted with private firms and written widely on the subject. His book shows how today's "entitlement" psychology dates to Social Security's muddled beginnings.
Most Americans don't understand what's going on. They think they're getting "their money" back.
Millions of Americans believe (falsely) that their payroll taxes have been segregated to pay for their benefits and that, therefore, they "earned" these benefits. To reduce them would be to take something that is rightfully theirs. Indeed, Roosevelt -- believing he had created a contributory program -- said exactly that:

"We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions. ... No damn politician can ever scrap my Social Security program."
The problem now is it's become and entitlement which nobody can touch.
What we have is a vast welfare program grafted onto the rhetoric and psychology of a contributory pension. The result is entitlement. Unsurprisingly, AARP's advertising slogan is "You've earned a say" on Social Security. The trouble is that contributions weren't saved. They went to past beneficiaries. The $2.6 trillion in the Social Security trust fund at year-end 2010 sounds like a lot but equals slightly more than three years of benefits.

With favorable demographics, contradictions were bearable. Early Social Security beneficiaries received huge windfalls. A one-earner couple with average wages retiring at 65 in 1960 received lifetime benefits equal to nearly 14 times their payroll taxes, even if those taxes had been saved and invested (which they weren't), calculate Eugene Steuerle and Stephanie Rennane of the Urban Institute.
But things are now changing in a way nobody or politician can stop - demographics.
But now, demographics are unfriendly. In 1960, there were five workers per recipient; today, there are three, and by 2025 the ratio will approach two. Roosevelt's fear has materialized. Paying all benefits requires higher taxes, cuts in other programs or large deficits. Indeed, the burden has increased, because it now includes Medicare, which is also viewed as an entitlement.

Although new recipients have paid payroll taxes higher and longer than their predecessors, their benefits still exceed taxes paid even assuming (again, fictitiously) that they had been invested. A two-earner couple with average wages retiring in 2010 would receive lifetime Social Security and Medicare benefits worth $906,000 compared with taxes of $704,000, estimate Steuerle and Rennane.
In some respects, it's turned into a giant Ponzi scheme. Everybody wants their money before the whole thing collapses. How soon before the cracks become so big they can't be ignored is hard to say. But we can't deny reality forever.

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