Social Security reform

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Social Security reform an analysis of Republican and Democratic plans to save Social Security
Guerra, Maria Davidson
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vii, 82 leaves : ; 28 cm


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Social security -- United States ( lcsh )
Social security ( fast )
United States ( fast )
bibliography ( marcgt )
theses ( marcgt )
non-fiction ( marcgt )


Includes bibliographical references (leaves 70-82).
General Note:
Department of Political Science
Statement of Responsibility:
by Maria Davidson Guerra.

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Source Institution:
University of Colorado Denver
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Auraria Library
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All applicable rights reserved by the source institution and holding location.
Resource Identifier:
66899700 ( OCLC )
LD1193.L64 2005m G83 ( lcc )

Full Text
Maria Davidson Guerra
BA, University of Colorado, 1998
A thesis submitted to the
University of Colorado at Denver
in partial fulfillment
of the requirements of
Master of Arts
Political Science
4 i

This thesis for Master of Arts
degree by
Maria Davidson Guerra
has been approved
Lucy McGuffey
Anthony Robinson

Guerra, Maria Davidson (M.A. Political Science)
Social Security Reform: An Analysis of Republican
and Democratic Plans to Save Social Security
Thesis directed by Professor Jana Everett
The increasing number of people anticipated to retire within the next
ten years is also expected to bring a crisis to the nations old age pension
program. In order to meet the benefits of a growing number of retirees, the
Social Security system will have to raise taxes, lower benefits or both. The
Republicans have introduced to the public a plan that they say will save the
Social Security program. According to President Bush, personal accounts
will increase the retirement benefits those who participates, giving each
person an ownership of their benefits and perhaps something left over to
leave to heirs. The Democrats see this plan as an assault on a seventy-
year old program that they perceive to be the most successful plan in U.S.
history. Personal accounts, they say, will not save the program but will, in
fact, be the first step in dismantling it.
This thesis evaluates both the Republican and Democratic proposals
to reform Social Security which reflect their differing ideologies on the role of
government concerning old age pensions. The ability of the projected plans
to enable the retirement system to meet its current and future obligations
and what that means to those in the workforce and those in retirement in
terms of costs and benefits will reviewed. The problems of an ageing
society are being seen globally and this thesis will present the experiences
in pension reform of Chile, China and Great Britain to discover what lessons,
if any, can be learned. Issues of intergenerational equity, social justice and
economic sustainability will be considered in the analysis of proposals to
reform Social Security.
This abstract accurately represents the content of the candidates
thesis. I recommend its publication.

I dedicate this work to my husband for his support and
encouragement. He is, always, the best part of me.

My thanks to my advisor, Jana Everett, for her unremitting patience,
attention, interest, advice, and most especially, tact, during my preparation
of this thesis. I also wish to thank the staff of the Political Science
Department for their support, understanding and cooperation

1. INTRODUCTION.............................................1
Thesis Outline..........................................2
Review Of Sources.......................................3
Fairness And Sustainability:
Bases For Evaluating Social Security Reform...........4
Financial Sustainability..........................4
Political Reality.................................6
2. BACKGROUND TO THE CRISIS................................10
Before Social Security?................................10
History Of Social Security.............................12
Amendments To The Social Security Act................15
How Social Security Works..............................17
Women And Social Security............................17
Cost Of Retirement.....................................20
Looming Crisis In Social Security......................21
Personal Accounts......................................24
Commission To Strengthen Social Security...............27
Changing Benefits Structure..........................36
Women and Personal Accounts......................37
The Disabled.....................................38
Federal Protections of Personal Accounts.............38

4. THE DEMOCRATIC PLAN................................. 41
Clinton And Federal Investment......................41
The Gore Plan.......................................43
Kerrys Stance......................................44
The Democratic Position.............................45
5. THE INTERNATIONAL EXPERIENCE........................ 47
The Chilean Ideal.................................47
Great Britain.......................................55
6. CONCLUSION...........................................60
What Is Needed To Retire?...........................60
Prospects For Social Security.......................61
Social Securitys Shortfall.......................62
Solving The Problem...............................62
Raise Taxes...................................63
Reduce Benefits...............................64
What Do We Want From Social Security?...............67
On The Issue Of Fairness......................... 68

In 2007, the first Americans bom after World War II will be eligible for
early retirement. At that time, the first segment of the 77 million baby
boomers bom after World War II will begin receiving Social Security
benefits (Andrews, 2004). Such numbers may strain the capacity of the
federal retirement program and render the program bankrupt. More
Americans under 30 believe in UFOs than in Social Security being there
when they'll need it (Peterson, 1999). This is hardly surprising considering
there are enumerable television shows purporting to prove the existence of
aliens and UFOs and none attempting to prove the solvency of the Social
Security system. In fact, television news seems to have embraced the
notion that Social Security is in crisis. One news report regarding the future
of Social Security featured two pro-privatization groups and no one to speak
on the solvency of Social Security (FAIR, 2004).
If there is no question that, left untouched, the Social Security system
will at the least experience a shortfall, there is a question concerning the
size of the shortfall, when it will affect the system and the greatest question
of all, how to fix the system so the shortfall doesnt hurt the economy or
leave millions of seniors in poverty. The Bush administration has estimated
that the gap between promises under current law and the revenues
expected will total $4 trillion over the next 75 years (Social Security, 2005).
An internal study in 2002 by the Treasury Department projecting the future
of Social Security into infinity concluded that the gap was actually $44 trillion
- and would climb each year that nothing was done (Andrews, 2004).
Social Security may go into debt, or, maybe, as some say,
bankruptcy, some time in the future. That day by most estimates could be
as soon as 2018, but many things, such as the current record deficits, or a
boom in the market, an increase in the birth rate or the death rate, and any
number of other factors could affect the viability of the program.
This thesis will analyze Social Security reform as presented by the
two major political parties as it defines their competing ideologies on the role
of government regarding old age pensions. The ability of the proposed

plans to keep Social Security solvent and maintain fairness between
generations will be considered.
The current system relies on taxes collected from current workers to
pay the benefits of retired workers, known as pay-as-you-go or PAYGO..
This system of intergenerational dependency may be altered depending on
which plan is executed. The effects of that possible change will be
The most important issue regarding Social Security is: does the
government have a responsibility to help provide for the retired workers and,
if so, how is that responsibility interpreted? Does the government have a
greater responsibility to lower income workers than to higher income
workers? What responsibility do workers have for their own retirement?
Thesis Outline
Chapter 2 will cover the history of the Social Security Act, describe
the program and its effects on particular categories of people: women,
minorities, disabled and self-employed. Chapter 2 will also elucidate the
problems facing this old age pension system.
President Bush has made a review of the Republican position
accessible by convening a Commission to consider strengthening Social
Security and limiting its approach to reflect his particular desire to inject
personal accounts into the scheme. The final report prepared by that
Commission is the focus of Chapter 3 of this paper. The Democrats have
not been so forthcoming. Perhaps trusting that Social Security is still the
third rail and hoping the Republicans will only hurt themselves by
attempting to radically change the program, the Democrats have no formal,
unified position on Social Security reform. Since Republicans control the
White House as well as both houses of Congress, presenting a unified
Democratic proposal to reform Social Security would be a futile effort.
Chapter 4 will analyze proposals by President Bill Clinton and Democratic
presidential nominees, Al Gore and John Kerry. A look at how other
countries have dealt with the same problem of an aging workforce and
retirement will be the focus of Chapter 5. It will analyze, briefly, Social
Security reform in Chile, often heralded as the ideal in the privatization of
Social Security; China, a country moving towards privatization of retirement
plans and facing a retired cohort of 300 million seniors; and Great Britain, a
country that initiated a version of personal accounts for retirement security
and wealth during the Thatcher era.

Finally, Chapter 6 will compare the Republican and Democratic
proposals, analyze how the different cohorts (age, sex and minority) will fare
under these proposals and review recommendations from non-political
groups. Chapter 6 will discuss current retirement programs and whether the
current economic climate encourages or even allows an element of self-
reliance when preparing for retirement, especially for low income workers,
and methods to alter Social Security to make it a viable program for coming
Review Of Sources
There is an abundance of writing on the subject of social security
reform. The analysis of the Republican plan relies mainly on the final report
prepared by the Presidents Commission to Strengthen Social Security
(Final Report, 2001) as well as monographs (Myers, 1996) and conservative
web sites, such as those of the Cato Institute (2005) and the Heritage
Foundation (2005) advocating the Republican position for private or
personal accounts.
The review of the Democratic position relies on speeches given by
President Bill Clinton, Al Gore and John Kerry (2005) as Democratic
candidates for President, and web sites of various Democrat leaders in the
Congress, Sen. Harry Reid, (2005) D-NV and Sen. Hillary Clinton (2005) D-
NY and others. Also, web sites opposed to the Republican plan such as the
Economic Policy Institute (Economic Snapshot, 2005) and the AARP (2005)
were used. A review of discussions among scholars Erik Schokkaert and
Philippe Van Parijs (2001) Kenneth Howse (2004), and others regarding the
standards and ethics to be considered in old age pension reform were also
The history of the Social Security Act, from its inception to the current
day, was drawn mainly from books written by Frances Perkins (1946)
President Roosevelts Secretary of Labor and the first woman to hold a
Cabinet post; Arthur J. Altmeyer (1966), Assistant Secretary of Labor and,
later, Chairman of the Social Security Board; and also the Social Security
web site (2005). Statistical information was available from the Department
of Labor web site (2005).
Finally, it has been important to keep track of the evolving
presentation of opinions regarding this reform and the response of the
American public to those presentations. Understanding how reform will
affect both workers and retirees was most often presented in the various

daily newspapers including the New York Times and the Denver Post were
an invaluable resource for this paper.
Fairness And Sustainability:
Bases For Evaluating
Social Security Reform
The Social Security program is a system in which those currently
working pay taxes which are immediately converted to benefit checks for the
retired. Because of the large number of babies born in the twenty years
following the end of World War II, the workers preparing to retire in the next
ten years and for twenty years after will create a bulge in the retired
population and correspondingly shrink the labor force. Such a shift will
affect the ratio of taxes collected to benefits paid and could result in the
insolvency of the program.
There are two ways to reform a program where the liabilities exceed
the assets: raise taxes or lower benefits. In the area of old age pension
reform either solution can be drastic and financially painful. One or both
methods may have to be enacted so the question is: what mix of benefit cuts
and tax increases can sustain the program and, at the same time, be
socially just? When old age pensions already represent a large part of the
budget, there is little room left to maneuver in terms of higher taxes or
increased public debt.
This section reviews the scholarly debate on the principles that
should underlie governments role in pension reform. There is no clear
consensus in this debate, but it does make visible the issues that should be
considered in evaluating the fairness and sustainability of proposed reforms.
Financial Sustainability
In a pay as you go (PAYGO) system, benefits to the retired are paid
out of taxes collected from those working. The advantage to a PAYGO
system is the sharing of risk between generations, but is this just? While the
older generation paid taxes to support the generation before them, when the
baby boomers retire, a larger dependency ratio will be created for the
workforce, meaning there will be fewer workers to support a greater number
of retirees. In addition, baby boomers enjoy a greater life expectancy than

the group before them; thus they will collect benefits for a longer period of
time. The demand on the working cohort will be significantly greater than on
the previous group. If the PAYGO system is maintained, then there may
come a time when there arent enough workers making enough money to
meet the benefits of the large retired population.
Government funding or even partial funding of the pension system
would increase the tax burden on the current workers, since that is the
group paying taxes into the system; they would, in effect, pay double taxes:
one tax for their own retirement put into private accounts, and one for the
current retirees. A mixed system, made up of some combination of a public
PAYGO component and, optimally, a privately funded component, made up
of collective and personal pension plans, would benefit the social security
system. Elsa Fornero (2003) agrees that switching to a funded system
creates a double tax burden on current workers who must bear the burden
of obligations to previous generations while accruing the funds needed for
their own retirement.
Private retirement accounts places the risk entirely upon the
individual, they do not share the economic risk within the retired cohort or
the intergenerational cohort. The individual must calculate how much will be
needed at retirement, estimating longevity, lifestyle costs and inflation. More
importantly, state Schokkaert and Van Parijs (2003), private funds are
subjected to unregulated market competition(p. 254). A negative shock will
affect contributions and benefits.
An employer-sponsored retirement plan does have the benefit of
pooling of the risk among fellow employees, which enables the individual to
better withstand losses. It also shifts some of the burden regarding
longevity and possibly inflation to current workers (Ibid). But an employer-
sponsored pension depends on a financially sound employer dedicated to
maintaining an adequate pension fund.
Financial sustainability is also dependent on the size of the benefit. A
minimum benefit that would allow the worst off a better chance at a better
retirement is optimal. But combining minimum benefits with a PAYGO
system would be problematic considering the burden already placed on
current workers. This is especially true since people are living longer and
healthier lives thus drawing on pensions longer.
The increase in longevity provides an argument for increasing the
age of retirement. Shouldnt those retirees who live longer and enjoy a long
retirement, thereby increasing the cost of their support, pay more into the
system to avoid being an increasing burden to future workers (Oksanen,
2003)? Not everyone is living longer, the low-income wage earner does not
enjoy such longevity, a delayed retirement disadvantages those with lower

incomes because they have lower life expectancies. Pushing back the
retirement age could mean a low-income worker may never get to enjoy
retirement (Myles, 2003). Delaying retirement may be a very difficult
remedy to pass because the population is fiercely opposed to pushing
back the retirement age (Schokkaert & Van Parijs, 2003). In fact, early
retirement has become a trend in Western civilizations and a strain on old
age pension systems.
Scholars Erik Schokkaert and Philippe Van Parijs (2003) assert that
reform of old age pension is a political decision and must be based on what
the people accept as just. The reality in any reform is that the political
feasibility of any plan will involve a balancing act between the principles of
fairness and sustainability, and it is the politics that will determine the social
acceptability of the any reform. Not delaying retirement is a perfect example
of politics trumping reason.
Political Reality
If shifting the cost of retirement to longer-lived workers by delaying
retirement is not a politically feasible action to address old age pension
reform, then who should bear the cost of reform? The traditional model
places all the costs of the ageing generation on wage earners. Myles (2003)
proposes ... fair (i.e. proportional) sharing of the additional costs associated
with supporting the retired that result from population ageing in which the tax
rate rises but benefits also fall... so that both parties lose at the same rate
(p. 264). Heikki Oksanen (2003) says that since the baby boomers chose to
have fewer children thereby altering the dependency ratio, perhaps they
should bear the burden of reform by accepting reduced benefits. Oksanen
(2003) says that given the low fertility and increased longevity of the elder
generation, they should accept pension reforms which involve reducing the
replacement rate and/or increasing the retirement age(p. 271). But if the
benefits are reduced and retirement is delayed, arent the baby boomers, by
paying the benefits of the generation that retired before them and then
contributing payroll taxes for a longer period of time and still getting a
smaller benefit, paying twice into the system and getting less out of it?
Schokkaert and Van Parijs (2003) believe that the welfare of those
worse off should come before those who are more affluent. This raises the
question of whether or not the government has an obligation to participate in
the financial support of retired citizens. While there may be disagreement
among scholars whether government has that responsibility, since

governments have been involved in old age pensions since the nineteenth
century, it seems a moot point. Schokkaert and Van Parijs (2003) point out
that without government involvement, there are those who will not prepare
adequately for retirement.
The government can protect retired workers from poverty by
guaranteeing a minimum benefit. John Myles (2003) argues for a
guaranteed minimum pension ... so that the least advantaged bear none
of the additional costs that result from population ageing (p. 266).
Determining benefits is difficult in any old age pension system, whether
funded, private or PAYQO, because of increased longevity. In the particular
issue of longevity and women, Schokkaert and Van Parijs (2003, p257) write
that because men dont live as long as women that perhaps it would be fair if
men were allowed to retire earlier than women or perhaps pay less into the
system than women, or the reverse with women paying more or receiving
lower benefits. For a man who has not prepared for retirement, the old age
pension may be the only provision left for his wife. Women do live longer
than men and because of that they collect benefits longer than men. The
kind of reform suggested by Schokkaert and Van Parijs would penalize
women simply because they are women. Elsa Fomero (2003) does not see
an actuarial inequality in women collecting benefits longer than men. She
states that in this respect, social security is for the family. She writes,"... if
bearing and rearing children is to be considered a socially relevant duty: a
favourable treatment (for women) by social security is an offset (and only a
very partial one) to the financial and non-financial costs involved (p. 275)
If the worker had a better understanding of the problem facing Social
Security as well as a clear resolve to care for each generation in retirement,
that would overcome any sense of unfairness in reform of the program.
Heikki Oksanen (2003) says, We as experts should be able to illustrate
these reforms ... clearly to the general public so that a majority of people
stop defending the current terms of retirement and understand that quite
drastic measures are unavoidable (p. 269). Intergenerational justice is near
the heart of this issue. Because of declining birth rates, the cohort of retired
and near retired is a considerably larger group than the one following. Is it
fair to make the younger generation pay more to support the previous group
because their elders chose to have fewer children? Can one generation
think only of its duty to the previous generation and ignore the obligation the

following generation will assume? Williamson, McNamara & Howling (2003)
point out that systems such as old age pensions lessen the burden on
families that would otherwise have to pay directly for the support of their
elderly parents, therefore the working cohort, or at least some element of it,
would still bear the burden of supporting the retired if retirement benefits
were drastically reduced.
Kenneth Howse (2004) does not believe that the notion of fairness
should be the main determinant in the acceptability of a reform plan. Howse
It is easy enough to agree that fairness (i.e. some test of
fairness) should be a constraint on any changes in pension
policy that might be proposed as adjustments to population
ageing without accepting that a problem of unfairness is
one of the main drivers or rationales for reform (p. 1).
The real problem is not fairness, but how to handle the pressures the
ageing society will put on the pension system. He goes on, ... society as a
whole still has the task of (i) meeting the increase in the real costs and (ii)
allocating this increase among different population and/or social groups (p.
If social justice is to be the criteria for old age pension reform, then it
must be decided which group is being served or disserved by the reform: the
workers, the retired, or the children of the retired. Do retirees with five
children receive more benefits than the childless retiree? Or do those
children pay less in taxes? Is this even a question that should be
answered? Howse (2004) argues ... that we have no workable criterion of
intergenerational fairness by which to measure the success of public policies
that aim to achieve if (p. 5).
It is beyond the scope of this thesis to take a definitive position on
what would be the most socially just and sustainable reforms for Social
Security. Nevertheless, the above scholarly debate identifies some
questions that should be directed at any proposed reform:

1. Does the reform increase or decrease the sustainability of Social
2. Does the reform protect the most disadvantaged sections of the
3. How do the reforms, in terms of reduced benefits, higher taxes,
and/or paying taxes for a longer time period affect differently situated
groups in the population?
a. Those who are retired
b. Those in the workforce
c. Those with longer or shorter life spans
d. Those who are parents or those who are not.
e. Those with other resources.
The final chapter of this thesis will evaluate proposed reforms in
terms of these questions. Once the effects of Social Security reforms are
clarified, there is a need for a national conversation on the questions of
fairness and social justice. In a democracy, deciding what is fair and
socially just is not something that can be left to the experts. The citizens
should decide.

To understand the problems facing Social Security today, it is helpful
to briefly examine the original purpose of the program and the
circumstances surrounding its enactment and revolution. This chapter
provides a concise history of Social Security and an explanation of how the
system works. This chapter then examines the factors that have contributed
to the looming crisis that faces Social Security if no reforms are enacted.
Before Social Security?
Old age pensions were not a new idea when President Roosevelt
introduced the plan to the Congress, but the government had never acted
upon the idea before because the notion of individualism (Williamson,
McNamara & Howling, 2003, p 8) was so prevalent in American society.
That changed with the economic depression that started in1929. For the
first time the citizens looked to their government for help. President Hoover
understood that high and steady wages would bolster the economy but he
passed no legislation to coerce companies to raise wages but instead chose
to ask them for their cooperation (Gupta & Lee, 1996). Their agreements did
not last long. Preferring that state and local government handle their own
issues, Hoover did not begin to use the full force and power of the federal
government until it was too late to keep the confidence of the American
When Franklin Roosevelt was elected President in 1932, the country
was in a deep depression. One out of every four workers was out of work
(Cyberessays, 2005); multiple families were crowded into small houses or
apartments (Gupta & Lee, 1996). Thousands went hungry, and in New York
City alone, 20% of the school children suffered from malnutrition
(Cyberessays, 2005). It was clear something needed to be done.
Roosevelt came to the presidency with a New Deal meant to
mitigate the suffering the economic circumstances had laid on the average

citizen. He created projects such as the Tennessee Valley Authority and the
Works Progress Administration to put millions to work. He inaugurated
programs such as the Federal Deposit Insurance Corporation (FDIC) and
the Securities and Exchange Commission (SEC) to protect the peoples
money and he signed Fair Labor Standards Act of 1938, which banned child
labor and established a minimum wage. All of these programs and many
others helped those currently working or able to work. The Social Security
Act was formulated to help those who were too old to work.
President Roosevelt wanted to create a program that would protect
Americans, as Roosevelt said, from the hazards and vicissitudes of life...
and give some measure of protection to the average citizen and to his family
against poverty-ridden old age (Social Security, 2005). While old age
pensions were originally grouped with unemployment, retirement insurance
soon became a program of its own. Protecting seniors required some
delicacy. Several assumptions underlay the thinking of those who crafted
the Social Security system. An old age pension backed by the government
had to be universal; all workers as well as employers had to contribute
(Perkins, 1946) and all workers were to receive benefits. There was to be
no means testing; Roosevelt did not want there to be any impression that
old age benefits were a dole, a government handout, so the system had to
be self-supporting. Further, the program was to be a contributory insurance
system, because, as Arthur Altmeyer (1966), who drafted the original
legislative proposal for Roosevelt, wrote, [ijt provided protection as a matter
of earned right (p. 14).
Roosevelts plan reflected a new theory of the responsibility and
purpose of government. The nation was no longer a haven for families
seeking to carve out a life in virgin territory; now the United States was an
industrial nation and the opportunity to live off the land was, for the most
part, long gone. Roosevelt was introducing programs in which the
government was assuming responsibility for the welfare of the citizenry. For
his part, Social Security was a safety net, but over the years it has grown to
be much more.

History Of Social Security
In 1935, when the U.S. government started the Social Security
system, government sponsored old-age pensions already existed in 125
countries and it is reasonable to believe that sooner or later social insurance
programs would have been introduced to the United States. It was the
economic devastation of the Great Depression that sped up the process.
In European history, the elderly who could no longer work depended
on the value of their property, their family and charity for their support. In
medieval times, guilds, a precursor to trade unions, formed to protect their
members during sickness, old age and their families in the event of death
(Social Security, 2005). Poor Laws were first established in England in the
seventeenth century. The government recognized some duty to provide for
the welfare of its citizens. It did distinguish between the "deserving" and the
"undeserving" poor; and naturally, there was a stigma attached to those in
need (Hill, 1990). The industrial revolution brought about the beginning of a
government role in old age pensions as those factory workers with no family
farm to fall back on, but only the work of their hands to support them, began
to retire. Chancellor Otto von Bismarck first introduced a government
funded pension system to Germany in the late nineteenth century. By the
time America adopted its social insurance program in 1935, there were 34
nations operating some form of state sponsored pension fund and about 20
of these were contributory programs like Social Security (Mueller, 2003).
While Roosevelt was still governor of New York and Herbert Hoover
President of the United States, the need for financial security became
critical. The economy had shifted from agricultural to industrial and
Americans had moved from farms and small rural communities to large
cities, where the industrial jobs were. In 1890, only 28% (Mueller, 2003, p.
1) of the population lived in cities, by 1930 this percentage doubled. The
move to the city also led to the demise of the extended family where several
generations lived together and supported each other. When young workers
left the farms to seek employment in the cities, often the parents or
grandparents stayed behind.
In 1929, the stock market crashed, and the economy collapsed. The
unemployment rate grew to 25 percent, and only a fourth of the unemployed
received any kind of assistance. The plight of the 7.8 million elderly
Americans was even more dismal; poverty among the elderly exceeded
40%, over half of them relied on private charities, public poorhouses, or their
families for support (Mueller, 2003). After several years of this Depression,
many younger people could no longer help their older relativesthey were
struggling just to feed themselves and their children.

While in office, President Herbert Hoover engaged in some limited
federal relief efforts to ease the suffering of the elderly or the unemployed.
His main response to the Depression was to advocate voluntary efforts. The
Republican Party was certain that the economy would soon right itself and
that, through a system of voluntary partnerships of government, business
and private giving on a massive scale the country would get through the
hard times. Volunteerism never materialized (Social Security, 2005)
Private charities were strapped as were the few local-government
relief agencies. Twenty-eight states had newly-formed old age assistance
programs (Social Security, 2005). However, the benefit amounts from those
programs were inadequate; payments averaged just 65 cents per day, and
only 3 percent of the elderly received any payments at all (Ibid). These state
plans were unsuccessful for several reasons. Seniors did not want the
stigma of being on welfare, and many poor seniors did not qualify for
benefits. Many states did not implement any relief programs. Those that
did allowed counties to opt out of the pension program, which a vast majority
did. Later, laws were enacted requiring county participation, but the effect
was minimal. By 1932 there were no state pensions in the south, and 87%
of the money available under these laws was spent in only three states:
California, Massachusetts and New York (Social Security, 2005).
President Roosevelt wanted to create a universal pension plan that
would supplement the income of the retired (Perkins, 1946). He had
competition in the creation of a pension plan for the elderly. Dr. Francis
Townsend had suggested a plan that was very appealing to seniors: every
citizen over the age of 60 who was not working and not a felon would
receive $200 a month to be funded by a national 2% sales tax
(Altmeyer,1966), a not inconsiderable sum during the Depression. In
current dollars, Townsends $200 is equal to nearly $4000/month (Scheiber
& Shoven, 1999).
The only other stipulation was that the entire amount had to be spent
every month, none of the money could be saved for a rainy day, though
how this could be verified was never specified. Townsends plan would
solve two problems. First, it would lift the elderly out of poverty, and second,
it would circulate money into the economy. Dr. Townsends plan was very
popular and was a big issue in a number of districts. Politicians who
supported the Townsend Plan were winning elections (Perkins, 1946).
Millions signed petitions endorsing the plan, but with over 7 million elderly it
is doubtful the government could have sustained those payments for very
long (Scheiber & Shoven, 1999).
Huey Long, once a supporter of Roosevelt began a campaign for the
presidency against FDR championing a soak the rich pension system that

advocated the very popular idea of taxing the wealthy. Long wanted the
government to confiscate the wealth of the nation's rich and privileged. He
called his program "Share Our Wealth, and the program immediately
became a movement. Clubs were formed in every state in the nation. His
old age pension plan would give everyone over 50 a pension. Long had to
be taken seriously because he was very popular and was a threat to
Roosevelt because he could steal enough votes, if not win outright, to allow
the Republicans to regain the White House and thwart all FDRs efforts at
social change.
In addition, there was a growing market of retirement insurance that
would suffer significantly if any government pension system was approved.
Senator Clark of Missouri wanted an amendment to the Social Security bill
that would exempt employees who had a pension plan at work with their
employer. Slightly more than 2% of workers anticipated an employment-
related pension from their company or their union. In 1900 there were a
total of five companies in the United States offering company-sponsored
pensions. The company pension was simply not available to most
Americans during the time prior to the Social Security law.
Roosevelt wanted Social Security to be universal and, therefore,
mandatory. If certain workers were exempted from the plan by virtue of
better employment plans, the program would look like a "handout. If
offering private pensions created an excuse to not participate, employers
would opt out of the system to avoid paying taxes for the highest paid
employees, thus weakening the system. Roosevelt emphasized the
insurance nature of the plan. Everyone who contributed for the requisite
quarters was covered. There was to be no means testing. There would be
no intimation that Social Security was a "dole.
There were objections to Roosevelts plan. Some felt the tax would
be too burdensome on small employers and low paid workers (Perkins,
1946, Altmeyer, 1966). Secretary of Treasury Henry Morgenthau
complained that it would be too difficult to collect taxes from small farms and
domestic workers so those groups were exempted from the original act
(Perkins, 1946). There were even accusations that the program was
socialism (Perkins, 1946, Altmeyer, 1966). In addition, some questioned the
timeliness of a pension program, believing that recovery from the economic
depression should come first (Altmeyer, 1966).

Amendments To The Social Security Act
The Social Security Act was made into law on August, 14,1935
(Kollman & Solomon-Fears, 2002). Over the years there have been many
amendments to the Social Security Act expanding benefits. Benefits were
extended to retirement-age widows as well as children of deceased, covered
workers and expanded to cover small farm workers and domestic workers
(Ibid). During the Eisenhower administration benefits for the disabled were
added (Ibid). In 1965, President Lyndon Johnson signed the bill adding
health insurance, Medicare, to the Social Security Act, providing affordable
health insurance to millions of retired seniors. President Nixon signed into
law a bill providing Supplemental Security Income (SSI) to those OASDI
(Old age, survivors, and disability insurance) recipients whose benefits were
excessively low and another bill which authorized a one time 20% cost-of-
living adjustment (COLA) and established the procedures for issuing
automatic COLAs each year, beginning in 1975 (Social Security, 2005)
President Jimmy Carter signed the Social Security Amendments of
1977. This legislation was designed to restore the financial soundness of
the Social Security system into the 21st century. The replacement rate, that
is, the amount of earned income that is replaced by Social Security, was
reduced by 5%. In addition, the amendment increased payroll taxes and
raised the taxable earnings limit (Scheiber & Shoven, 1999).
In 1981 Ronald Reagan undertook a plan to reform the Social
Security program to protect the system from the shortfall it would soon
experience. In his effort to reform Social Security he made several
mistakes. He didnt tell the people how close the Social Security system
was to default. Although the program was only months away from not being
able to pay out benefits, Reagans announcement of proposals to change
the system seemed to come out of nowhere and Social Security recipients
were alarmed.
Social Securitys Big Fix took place in 1983, during Ronald
Reagans first term in office. The Democrats did what worked very well for
them and let the Republicans carry the ball as far as presenting the
Reagans proposed changes to the system; and the Republicans did what
worked out very badly for them: they threatened the security of Social
Security. The fix itself was a bipartisan accomplishment, with an equal
measure of tax increases and benefit cuts. But it was the Democrats who
played their hand smoothly and the Republicans who suffered in the next
election, losing twenty-six seats (Scheiber & Shoven, 1999).
While the Social Security had been fixed in 1977 under Jimmy
Carter, errors in forecasting unemployment rates, wage increases, inflation

and, especially, the oil crisis, left the Social Security program seriously short
on income. Reagan sought to change the system by making early
retirement painful. Early retirement is set at age 62 and benefits are 80% of
what are expected at age 65 (Scheiber & Shoven, 1999, p. 186). Reagan
wanted to reduce benefits to 55% of the expected full term benefit. Today
the reduced-benefit level falls from about 80 percent to about 70 percent for
early retirees, as the normal retirement age rises to 67, but early retirement
age remains age 62 (Worsham & Grey, 1997). While Reagans proposal
represented a serious cut in benefits, it would have encouraged people to
keep on working and paying into the system.
In addition, Reagan wanted to phase out the earnings test, which
reduced benefits to seniors who continued to work past age 65. (The
earnings test, which reduced OASDI benefits for those aged 65 to70 who
continued to work, was repealed during the Clinton administration effective
January 2000.) There were other steps Reagan wanted to take to remedy
the Social Security ills, all of which cut benefits to future, but not current,
recipients and none of which raised payroll taxes (Scheiber & Shoven,
Reagans proposals were disastrous for him and his party. The most
contentious part of Reagans plan was the stiff penalty for early retirement.
On this issue alone Reagan took a lot of heat including a resolution from the
Senate condemning the proposal written by Republican Senator Bob Dole of
Kansas. That resolution by Dole was written to spare Reagan the
embarrassment of an even more vicious resolution written by the
Democrats. Reagan retreated and formed a bipartisan committee to find a
way to save Social Security, which was, by then, only months from default.
The committee came up with a plan that included cutting benefits as well as
raising taxes, meaning to keep the program solvent until 2060, more than
seventy-five years. By then, the youngest baby boomer would be over
ninety and how many of them could there be?
Perhaps embarrassed because he gave into a tax increase, perhaps
too tired to argue the point, Senator Dole, a key member of the committee,
challenged his fellow senators not to criticize the plan unless they had
something better to offer. Remarkably, the challenge worked and the
amendment to Social Security was soon passed by Congress and signed by
the President.

How Social Security Works
When Social Security first began, each worker paid a tax of 1% on
the first $3000 of annual income matched by the employer; the Social
Security tax increased regularly, reaching 3% of wages for both employer
and employee (6% total) in 1949 (Scheiber & Shoven, 1999, p. 41).
Originally, a worker qualified for benefits after contributing to the system for
five years (its now ten). Benefits paid are based not on how much an
earner contributed to Social Security but on how much an worker earned
over a lifetime of work with low wage earners receiving proportionately
greater benefits than high wage earners (Peterson, 1999). Federal
employees were originally excluded from the program because the
government provided them with a much better retirement plan. That
changed with the Big Fix when the government required new federal
employees to join Social Security because the system needed those payroll
taxes to help fund the system (Myers, 1996).
Today, each worker pays a tax of 6.2%, matched by the employer, on
the first $90,000 earned a year as of 2005; the upper limit increases every
year. The self-employed must pay the entire 12.4%. The lowest income
worker will see an OASDI check equal to about 56% of wages while the
highest earner will receive benefits equal to about 29% (Scheiber & Shoven,
1999, pg 178) with the maximum amount, in 2006 set at $ 2,053/month
(Social Security). There is no minimum benefit although Social Security will
not write a check for less than $1.00. Workers who havent worked for the
required ten years will get no benefits at all unless that worker stopped
working due to disability. Since benefits are based on 420 quarters (thirty-
five years) of work and contributions to FICA, every year or quarter out of
the labor force that results in less than thirty-five years total will decrease
benefits significantly.
Women And Social Security
Social Security benefits are skewed in favor of lower income workers.
Benefits are also skewed in favor of married women who do not work
outside the home. The following fictionalized scenario of three women
illustrates how womens benefits are affected more by their marital status
than by whether or not they worked outside the home.
Allison is unmarried and childless. She worked as a secretary all her
life. Upon retirement at age 65 her monthly OASDI benefits are $650/month

based on her lifetime earnings. These benefits will increase annually based
on cost of living adjustments .
Betty also worked all her life as a secretary earning the same salary
and, upon retirement, received the same benefits as Allison, $650/month.
The difference is that Betty married. Once retired, her husband, John
collected $1250/month in OASDI benefits. Because Bettys benefit of
$650/month was greater than one-half of Johns $1250/month, Betty
collected her own OASDI benefit. If one-half of Johns benefit had been
greater than Bettys $650, Social Security would have automatically sent her
the larger sum. Together their total benefits equaled $1900/month. When
John died Betty had a choice: she could continue to collect her own benefits
which she had contributed to and worked for or she could collect Johns
benefits which were considerably higher, but she couldnt have both.
Actually she didnt have a choice; when notified of her husbands death,
OASDI canceled Bettys personal benefits and sent her the benefits earned
by her husband, that being the larger amount.
Finally we have Bridget. Bridget was very fortunate, her husband
was very comfortable financially and Bridget never worked outside the home
and, therefore, never contributed to Social Security. When Bill retired he
collected benefits of $1550/month and, as his wife, Bridget automatically
collected $775/month, one-half of Bills benefit. Bridget, who never collected
a single paycheck, who paid not one cent of FICA, was collecting more in
OASDI benefits than Allison or Betty, both of whom had worked and
contributed to the Social Security system all their working lives. And, when
Bill died, Bridget was entitled to collect Bills benefits of $1550/month, more
than Betty was allowed to collect.
Divorced women and men are not ignored by the Social Security
program and are allowed to claim benefits based on the former spouses
earnings but only if they had been married for over ten years. The
maximum benefit is 50% of the benefit the worker would receive at full
retirement age. In general, a person applying as a widow/widower cannot
receive benefits if they remarry before the age of 60 (50 if disabled) unless
the later marriage ends, whether by death, divorce, or annulment. However,
remarriage after age 60 (50 if disabled) will not prevent payments on a
former spouse's record.
Working women also suffer when they decide to take time out for
children. Benefits are not calculated by contributions to the system but on
lifetime earnings, currently determined to be thirty-five years. Women
typically sit out of the work force when they have and raise children or if an
illness in the family requires them to stay home to care for a family member.
In 1999, women worked a median 32 years. Not only do they diminish their

earning capacity, but each year or quarter they sit out represents a zero
when Social Security is averaging lifetime earnings which diminishes their
What is important, though, is that Social Security keeps elderly
women, especially married women, out of poverty. Women receive 53% of
the benefits while paying 38% of the payroll taxes. In 1997, over 52% of
women eligible for Social Security were in poverty; after receiving those
benefits the number of those poor, elderly women dropped to under 15%
(Porter, Larin & Primus, 1999).
For many Blacks, Hispanics and other minorities, Social Security is
the only retirement plan they have. Minorities generally work at low-income
jobs, employment that that typically does not offer employer-financed
pension plans or a 401 (k) or leave enough money to contribute to or start an
IRA. OASDI benefits are skewed so that low-income workers receive
greater benefits upon retirement considering their income and contributions.
Harvard professor Jeffrey Liebman reports that black Americans
receive almost $21,000 less in Social Security retirement benefits than
whites with comparable incomes and marital situations (Liebman, 2001).
According to the National Center for Health Statistics, a black male born in
1999 could expect to reach 67.8 years of age. Given that he would be
ineligible for full benefits until age 67, he could anticipate about 10 months of
Social Security benefits. The equivalent figures are 74.6 years for white
males, 74.7 for black females and 79.9 for white females (Nelson, 2000).
Due to shorter life spans, blacks simply collect less as retirees of what they
pay into Social Security. However, survivors benefits disproportionately
favor blacks: 3.5 million children receive survivor benefits. While blacks
make up 12% of the general population, 23% of those children collecting
benefits are black (Blacks need better understanding of Social Security's
value, 1999). Weller and Bragg (2001) write, Once disability and
survivorship benefits are accounted for, African-American men receive the
same for each dollar paid into the system as white men, and African-
American women received slightly more than white women (p. 1).
Hispanics have a greater level of dependence on Social Security than
other retired groups and receive more in benefits for each dollar they pay
into the system than either non-Hispanic whites or blacks. This is because
the program disproportionately benefits people with low incomes, higher-

than-average disability rates, more children per family, and long lives, all of
which characterize Hispanics (Torres-Gil, Greenstein and Kamin, 2005).
Social Security plays a big role in keeping elderly Hispanics out of poverty.
Nearly one-fifth of elderly Hispanics live in poverty, in contrast to one-half if
there were no Social Security benefits.
Social Security for the self-employed is extremely expensive. The
self-employed must pay both the employee and employer share of FICA
taxes -12.4% of earnings (15.3% if you include the Medicare tax). It is often
thought an increase in FICA would drive the self-employed out of business,
but a recent study showed that an increase in FICA not only resulted in the
self-employed staying in business, but it actually encouraged workers to go
into business for themselves. Self-employment allows the opportunity for
those workers to misrepresent their income; in other words, cheat on their
taxes (Hyde, n.d.). A report by Shih-Ying Wu (2005) states that self-
employment may actually increase when taxes increase. The US
Department of the Treasury estimates that approximately $3.2 billion in
taxes is lost each year in unpaid social security, Medicare and other taxes
because of misclassification or income tax underpayment (Wu, 2005).
The self-employed do have a very generous retirement plan
approved by the government call Keoughs. A Keough allows the self-
employed to defer up to $40,000 annually in a retirement savings plan. The
maximum in FICA taxes the self-employed would owe is $11,600 (12.4% of
$90,000) and none of that is tax deferred. In order to take fuff advantage of
a Keough, though, the self-employed would have to be honest in stating
earnings when paying taxes.
Cost Of Retirement
A check of any banks website would convince the reader that assets
of $360,000 to $500,000 would be necessary to retire securely.
Commercials insist that pensions, 401 (k)s and IRAs aren't enough to sustain
the elderly through retirement; additional investment is a necessity. Many
people believe this and consequently have no intention of retiring. In fact,
an American Association of Retired People (AARP) survey revealed that

only 16% of baby boomers questioned say they plan to fully retire while the
rest say they will at least work part time (80%). Of those, 23% will be
working for the income (Temple, 2000). Nearly half of all of retirees depend
on Social Security benefits as their main means of support through
retirement (Porter, Larin & Primus, 1999) and it keeps them out of poverty.
The number of elderly people relative to people of working age in the
population is predicted to be more than twice as large in 2040 as in 1960.
But the number of total dependentschildren and the elderly relative to
people of working age is predicted to be lower in 2040 than in 1960
(Friedland & Summer, 1999, p. 7). There will be more elderly but fewer
children. Friedland and Summer (1999) suggest that there will be lesser
need for schools, playgrounds and other programs geared to the young so
the workers responsibilities to the non-working wont increase, but shift.
Looming Crisis In Social Security
Perhaps the single greatest reason for the Social Security systems
fiscal demise can be described in one word: demographics. In the future,
more people will be retiring than entering the work force. Retirees get their
benefits from workers; the fewer workers there are the smaller the tax base.
The reason there are more people about to retire is the baby boom, the
large number of babies bom following the end of World War II. There are
about 77 million baby boomers. To put this number in perspective, in 1970
there were less than 15 million Americans of retirement age, by 2075, there
is expected to be nearly 86 million over age 65 (Peterson, 1999). Part of
that projection is due to the fact that people are living longer. In 1935, when
Social Security was enacted and the retirement age was set at 65, the
retirement age common in most of Europe, life expectancy for men was 63
years. Contrast that with the current life expectancy for a man in 2005,
which is nearly 75 years, and for a woman the current life expectancy is over
80 years (CIA, 2005).
Now these boomers are facing retirement. The Census Bureau
(2003) estimates that 25% of all baby boomers will live to be 85. In 1945
when the system was new and there were few people collecting benefits,
there were 45 workers for each Social Security recipient. In 2000 there
were three workers per beneficiary and by 2060 there will be fewer than two
workers per beneficiary (Peterson, 1999). The payroll tax increases of the
1983 Big Fix, created the surplus that has kept Social Security solvent, but
that surplus is expected to run out in a few years.

President George W. Bushs opinion is that if no change is made to
Social Security in the next few years, the government may be put in the
position of having to subsidize benefits out of the general fund or reduce
those benefits. Medicare, another social program created in 1965 to provide
health insurance for the elderly and disabled, is already subsidized by the
general fund. Medicare Part A is a health insurance program that gives, i.e.
provides without a premium, hospitalization coverage to retired and disabled
workers. Medicare is partially paid by a payroll tax of 1.45%, matched by
the employer, on all earnings and that still does not cover the total cost of
that benefit. A monthly premium of $78.20 in 2005, taken directly from the
beneficiarys Social Security check, pays for Part B, which covers 80% of
the cost of doctor visits and tests. Premiums from Part B cover only 22% of
the actual cost of these services; the balance comes out of the general fund
(Peterson, 1999 p. 37). Medicaid, a health insurance program for the needy
in which the federal government shares costs with the individual states of
50% to 83% depending on the wealth of the state, also comes from the
general revenues (Peterson, 1999, p. 38). Recently, coverage for
prescription drugs was added to the Medicare program and that will further
escalate the cost of the Medicare program. How much more can the
government take from the general fund to cover these benefits before it
must cut back on those benefits as well as other programs like education,
transportation and defense?
Social Security is a pay as you go system, (PAYGO). This means
that the FICA (Federal Insurance Contributions Act) taxes collected each
month are transferred into the OASDI checks that are sent out to the retired
and disabled each month. Right now there are more workers paying into the
system than beneficiaries receiving checks which means there is money left
over, a surplus. This surplus is put into a trust fund. In this instance trust
fund is merely an accounting device. These dollars are earmarked for
Social Security. The actual money, however, does not sit in a locked vault
but is put into the general fund in exchange for Treasury obligations. These
obligations are government treasury bonds backed by the full faith and
credit of the United States government (Peterson, 1999, pp. 21-22). This is
part of the problem: when the day comes that Social Security must call in
those treasury bonds, the government will have to pay them back with
interest and fill the hole in the budget made by the absence of those funds.
As originally conceived, the Social Security program was meant to be
a safety net to protect retired workers from the hazards and vicissitudes
of life (Social Security, 2005). Over the decades the system has evolved to
be much more than a safety net for workers, but provides Vital protection for
themselves in retirement or disability, their spouses and their children. This

evolution has caused many Americans to look forward to and depend on
Social Security as their main financial support in their retirement. This
highlights some of the difficulties that must be navigated in any plan to
reform Social Security.

President Bush and the Republican party have attempted to create
the impression that Social Security, a federal insurance plan created to lift
the elderly out of poverty, is really a bad financial venture. They ignore the
true nature of the program: a pooling of assets to share the risk. Instead,
they portray it as an investment, suggesting a better rate of return is
possible using free market methods. John Harwood (2005) wrote in the
Wall Street Journal,
it is an ideological debate about whether Social Security
remains a social insurance safety net, which redistributes a
modest amount of income from rich to poor, or moves
toward greater individual opportunity, risk and reward.
This conflict in ideology was highlighted when a White House aide
For the first time in six decades the Social Security battle is
one we can win. And in doing so, we can help transform the
political and philosophical landscape of the country (Obama,
Personal Accounts
When George W. Bush took office in 2001, he was more than ready
to take advantage of the prosperity President Bill Clinton left him. Eight
years of economic growth, a record surplus and, especially, a bull market all
played into Bushs desire to introduce some form of privatization into the
Social Security system.
Upon his election, Bush immediately appointed a bipartisan
Commission with an order to find a way to strengthen Social Security

utilizing private accounts. The Commission was led by Richard Parsons,
CEO of AOL-Time Warner and the late Senator Daniel Patrick Moynihan (D-
NY), (Moynihan was also on the committee organized by Reagan in 1983),
and included fourteen other members.1 The report was submitted
December 21,2001, but because of the events of 9/1 land the subsequent
collapse of the stock market and wars with Afghanistan and Iraq, there was
little interest in reforming Social Security and the report was set aside.
However, believing his reelection gave him some political capital, President
Bush began his second term determined to radically change Social Security.
In 2000, over 50 percent of Americans were investing their own money in
the stock market, albeit most investment was indirect, usually through
mutual funds, annuities and 401 (k)s, etc. Perhaps this involvement with the
market would engender the support he needed.
In his State of the Union address given Feb. 2, 2005, President Bush
took that next giant step in his plan to reform Social Security. In his address
he described Social Security as a good program that had outlived its
usefulness. He said,
Thirteen years from now, in 2018, Social Security will be
paying out more than it takes in. And every year afterward will
bring a new shortfall, bigger than the year before. For
example, in the year 2027, the government will somehow
have to come up with an extra $200 billion to keep the system
afloat and by 2033, the annual shortfall would be more than
$300 billion. By the year 2042, the entire system would be
exhausted and bankrupt (Bush, 2005).
As he discussed his proposed changes to the system, he also said
that those changes would not affect those already receiving benefits or
those workers 55 or over. (In other words, This isnt your fight.) But he
stressed to younger workers that the demise of the Social Security system
was at hand and this was their chance to grab some wealth for themselves.
In order to emphasize the attractiveness of personal accounts, the President
tossed out other ideas to salvage Social Security, most of them offered
previously by Democrats, and all reducing benefits: increasing retirement
age (President Bill Clinton), discouraging early retirement (Former. Sen.
1 Other members include: Lea Abdnor, Sam Beard, John F. Cogan, Bill
Frenzel, Estelle James, Robert L. Johnson, Gwendolyn S. King, Olivia S.
Mitchell, Gerald L. Parsky, Timothy J. Penny, Robert C. Pozen, Mario
Rodriguez, Thomas R. Saving, Fidel Vargas.

John Breaux, D-LA), and a few other ideas. The President said, All these
ideas are on the table. He neglected to mention that private accounts
would also reduce the benefits paid by the government. The President laid
down a few guidelines for Social Security reform:
We must make Social Security permanently sound, not leave
that task for another day. We must not jeopardize our
economic strength by increasing payroll taxes. We must
ensure that lower income Americans get the help they need
to have dignity and peace of mind in their retirement. We
must guarantee that there is no change for those now retired
or nearing retirement. And we must take care that any
changes in the system are gradual, so younger workers have
years to prepare and plan for their future (Bush, 2005).
In that address, the President described how personal accounts
would work. Younger workers would be allowed to set aside part of their
FICA taxes for personal accounts. The benefit, said the President, is that,
Your money will grow, over time, at a greater rate than
anything the current system can deliver and your account
will provide money for retirement over and above the check
you will receive from Social Security. In addition, you'll be
able to pass along the money that accumulates in your
personal account, if you wish, to your children or
grandchildren. And best of all, the money in the account is
yours, and the government can never take it away (Bush,
He went on to describe the protections the government would provide
for these personal accounts.
We will make sure the money can only go into a conservative
mix of bonds and stock funds. We will make sure that your
earnings are not eaten up by hidden Wall Street fees. We will
make sure there are good options to protect your investments
from sudden market swings on the eve of your retirement. We
will make sure a personal account can't be emptied out all at
once, but rather paid out over time, as an addition to
traditional Social Security benefits. And we will make sure this
plan is fiscally responsible, by starting personal retirement

accounts gradually, and raising the yearly limits on
contributions over time, eventually permitting all workers to
set aside four percentage points of their payroll taxes in their
accounts (Bush, 2005).
In that speech the President launched his long awaited campaign to
fundamentally change the Social Security system.
Commission To Strengthen Social Security
On May 2,2001, President Bush announced the establishment of a
bipartisan, 16-member Commission "to study and report specific
recommendations to preserve Social Security for seniors while building
wealth for younger Americans (CSSS)." The President directed the
Commission to propose Social Security reform plans that would strengthen
Social Security and improve its fiscal sustainability, while meeting several
Modernization must not change Social Security benefits for retirees
or near-retirees.
The entire Social Security surplus must be dedicated to Social
Security only.
Social Security payroll taxes must not be increased.
Government must not invest Social Security funds in the stock
Modernization must preserve Social Securitys disability and
survivors components.
Modernization must include individually controlled, voluntary
personal retirement accounts, which will augment the Social
Security safety net (Executive Order, 2001).
For inspiration the Commission looked no further than the Thrift
Savings Plan (TSP), the government sponsored retirement plan created for
federal employees after the Social Security amendments of 1983. A

precursor to the 401 (k), TSP was created to make up for the lower benefits
paid by OASDI that federal workers were forced to accept under the Big
Fix. In the TSP, workers choose from a range of investment funds
designed to offer a variety of investment risks, depending on how much they
have saved in the first level, or Tier, of the program. When employees
have accumulated a threshold account balance, initially $5000, they are
allowed to invest that threshold balance plus subsequent contributions in a
range of "Tier 11" qualified private-sector funds (Final Report, 2001).
The five funds are: the Government Securities Investment (G) Fund,
Fixed Income Index Investment (F) Fund. Common Stock Index Investment
(C) Fund, Small Capitalization Stock Index Investment (S) Fund, and the
International Stock Index Investment (I) Fund (Myers, 1996, pg 31). The G
Fund is the safest investment and is nothing more than buying government
bonds. The return is described as being similar to those benefits already
received by Social Security. The International fund, the I Fund, is
considered the riskiest. The I Fund invests in a stock index fund that tracks
the 21 countries included including Europe, Australasia, and Far East (TSP
Funds, 2005).
Participation by federal employees in the TSP is not mandatory, and
federal employees still pay FICA taxes and receive Social Security benefits.
Plus, an additional 1% of employee salary, at taxpayers expense, is put into
a retirement fund regardless of any contribution into the TSP. Those that do
participate have protections for their investments provided by the
government. Workers arent allowed to run through their money all at one
time and, in fact, their use of their funds is monitored. The Commission
plans to use these investment models and restrictions to create personal
accounts to replace benefits paid by Social Security.
In addition to these funds, the Commission recommended the
creation of an Inflation Protected Bond Fund (Final Report, 2001). Just as
the government insures deposits at a bank (FDIC) or a savings and loan
(FSLIC), Treasury Inflation Protected Securities (TIPS) is an option the
depositor could buy to protect contributions to personal accounts. With
... the value of the TIPS is automatically adjusted to the
inflation rate as measured by the Consumer Price Index
(CPI). If the CPI goes up by half a percent the value of the
bond would go up by half a percent. If the CPI falls, the value
of the bond does not frill because the government guarantees
that your original investment will stay the same (Final Report,
2001, p. 52).

TIPS protects the purchasing power participants have accumulated in
their personal accounts. Sales "loads" or other marketing fees are not
allowed. All fees are included in one annual charge and clearly stated as a
percentage of assets.
The investor would be offered a choice of the three investment plans:
a balanced, conservative and growth fund. A growth fund would emphasize
stocks while a conservative fund would invest more heavily in government
and corporate bonds. Each model represents a voluntary personal account
into which the participant contributes taxable income, ranging from two to
four percentage points of FICA, and an additional one per cent of income
(not FICA) into a personal account. Social Security benefits are offset; that
is, each percentage of FICA put into a personal account is reflected in a
percentage reduced in OASOI benefits. Social Security benefits are reduced
based on how much you put into a personal account, not on how much the
investment earns. If your investments lose money, your OASDI benefit does
not increase to make up for that loss.
In its final report, the Commission cites many reasons why it believes
personal accounts are better than a government supported retirement
Retirement security will be increased through personal
accounts because they would facilitate wealth creation
for individual participants.
Financial security is enhanced by asset ownership.
Correspondingly, retirement security for Social Security
participants will be enhanced by ownership of assets
accumulated through the Social Security system,
relative to a claim to benefits that must remain subject
to political negotiation. (Final Report, 2001, p. 26) (A
not so subtle hint that Congress could vote to reduce
To distinguish personal accounts from social security and enhance
their attractiveness to the wage earner, the plan affirms that the money in
personal accounts is just that, personal, and belongs to the participant, not
the government. The Report says:
Social Security should be extended to include
inheritable assets.

Strengthening Social Security to include personal
accounts can add valuable protections for widows,
divorced persons, low-income households and other
Americans at risk of poverty in old age (p. 11).
Finally, the report asserts that with the money accrued in personal
accounts and the miracle of compound interest, the worker can be richer
than with Social Security alone. It says, Personal accounts would permit
individuals to seek a higher rate of return on their Social Security
contributions, offering higher total expected benefits to individuals with
accounts than those lacking them (p. 26). To finance this plan, it will be
necessary to boost the finances of Social Security (this will have to be done
whether personal accounts are included in the plan or not). However, the
proposal states that advancing funds to finance personal accounts is better
than putting up funds to pay promised benefits.
The report makes the claim that personal accounts are better for the
country and the economy because they will lead to an increase in national
saving. The Final Report (2001) reads:
Approximately half of United States households save nothing
in an average year, and millions hold no appreciable financial
assets. Establishing personal accounts within Social Security
would advance a highly progressive principle: accumulating
assets for the half of American households who have not
compiled this measure of wealth after contributing 12.4
percent of their wages to support the Social Security system.
Moreover, recent research has concluded that individuals with
personal defined contribution accounts would voluntarily
choose to save more than individuals with a comparable
defined benefit plan (pp. 29-30).
Defined-contribution plans rely on how much worker and/or employer
contribute during the working years to a retirement account. Roth IRAs,
original IRAs, personal retirement plans) and 401 (k)s (an employer offered
retirement program) plans are typical of defined contribution accounts. A
traditional pension plan, or defined benefit plan, pays a fixed amount to
qualified participants or pensioners. The amount is determined by the
participants salary history, years of service and generosity of the employer.
A traditional pension may, or may not, include a cost-of-living adjustment.

Today, all of a retirees federal retirement protections come from
Social Security and the report makes the claim that those benefits could
change at the whim of the Congress although any plan to reduce benefits
could increase a politicians vulnerability at the polls considering the voting
power and increasing number of seniors. Under the proposed personal
accounts system, workers could have the option to receive some of their
benefits from the traditional system, "Social Security Part A," the traditional
but decreased OASDI benefit, and some from a personal account "Social
Security Part B," the portion of FICA that is invested. The Commission
anticipates that the total of these two parts could provide larger benefits than
what is currently paid under Social Security.
This is not the first time that the idea to invest in the stock market to
bolster Social Security has been recommended. In his State of the Union
address in 1999, President Bill Clinton suggested the government invest
some of the Social Security surplus in the stock market. Alan Greenspan,
Chairman of the Federal Reserve, immediately came out against that idea
saying, There is really no strong evidence to suggest any positive aspects
of moving Social Security funds into equities," and further, that the
government would end up in the business of picking which American
companies are worth investing in (Goldstein & Mufson, 1999, pA1). The
risk of corruption is a good reason for the government to not be involved in
the stock market. Government investment could easily succumb to political
pressures that lead to investment based on non-financial criteria, which may
threaten account performance. Intense lobbying and campaign
contributions designed to influence investment policy could place the
government in a position to interfere with corporate decision-making and
lead to serious conflicts of interest. For example, the government could be
simultaneously regulating and investing in the same companies, or even
filing lawsuits against such companies (Final Report, 2001).
Personal ownership, the Commission asserts, is preferred; when
people own the account themselves, the assets are less likely to be diverted
for non-Social Security purposes. Personal accounts allow every participant
to choose an investment portfolio that is consistent with their own
preferences, while central government investment essentially forces
everyone into a "one size fits all" portfolio, or worse, a portfolio that Even
so, in the Presidents State of the Union address, Bush said the government
would control the mix of investment (Bush, 2005).
One of the goals of the Commission is to increase personal savings.
Personal accounts would lead to an increase in national savings, which is
nearly nonexistent today (Entin, 2001). Money put into Social Security today
is not money saved; benefits are paid and anything left over goes into the

general fund and none of that is saved. However, money put into personal
accounts would be regarded as savings. The general fund would lose that
money and the result would be a toss of government programs or borrowing
to fund them thereby increasing the national debt by as much as two or
three trillion dollars or more (Reid, 2005). There is no way to know whether
this program would result in greater national savings or more national debt
since, in the final report, it states that participation is not mandatory.
Although a 67% participation rate is the figure used in proposal estimates; it
is unknown how many people will obtain personal accounts or how much of
the allowed contributions will be diverted to personal accounts.
There is also a possibility that personal accounts could lead to an
increase in early retirement, a phenomenon that is already growing and
plaguing the Social Security system. Numerous studies indicate that Social
Security has led to earlier retirement in the US. Sixty percent of those
eligible opt for early retirement benefits (Ross & Larimore, 2001). The Final
Report (2001) writes, High tax rates provide an incentive for individuals to
retire rather than to remain in the labor force (p. 40). Workers who retire
early avoid paying FICA taxes for the last three years before age 65, when
their salaries are at their highest. The decrease in benefits is easily offset
by the taxes avoided in the remaining years, for FICA, Medicare and income
tax and, at the high income level, benefits dont change that much. Dan
Moreau (2002) reports that based on average life expectancies, early, full
and delayed benefits are designed to be a wash over a workers lifetime.
The final report, however, refers to early retirement as a drain on the
nations economy, reducing output and growth and making it that much
more difficult to finance ... future retirement benefits (Final Report, 2001, p.
The nations ability to support its retiree population is directly related
to the ratio of those in the workforce to those in retirement. Accordingly, the
maintenance of the labor force is a critical element of Social Security reform.
Personal accounts would encourage the individual to stay in the workforce.
This could be especially true of the high-income wage earner. However, if
this worker is already earning more than the maximum taxable income, then
the benefits received will not increase (except by COLA) if the worker stays
in the workforce. That worker is already at the top and probably has
considerable assets to supplement the retirement years so leaving the
workforce at 62, or even 55, if the portfolio is strong enough, may took very
attractive. But it would also leave the Social Security system minus a
taxable worker, and one subject to high taxes at that.
Under the proposed plan, it is assumed that personal accounts can
be administered in an efficient and cost effective manner. The Social

Security system enjoys an efficient administrative cost of less than1%
(Furman, 2005). in his State of the Union address, the President said, "We
will make sure that your earnings are not eaten up by hidden Wall Street
fees (Bush, 2005). Fees to manage a 401 (k) include 12b1 fees, front or
back loads and redemption fees. A fee rate is not stated in the final report.
However, the conservative Heritage Foundation, in a demonstration of the
advantages of personal accounts, uses an annual administrative fee of .03%
(Heritage Foundation, 2005), considerably less than the administrative costs
of the current Social Security system.
Nevertheless, the Government Accountability Office (GAO) has
observed that the costs and administrative demands of an individual account
system would hurt smaller employers. While accounts would be voluntary
for employees, the employer would have to accommodate any employee
who wished to participate, even if only one employee wanted a personal
account (Purcell, 2005). Francis X. Cavanaugh (1999), creator of the
federal employees TSP, asserts that the administrative costs of personal
accounts makes the plan infeasible, writing, The administrative expenses
exceed any reasonable estimate of investment earnings (p 135).
At present, the Social Security Administration sends out an annual
report to workers over 55 advising them of their lifetime contributions and
expected benefits although anyone can request a report at any time.
Statements for retirement accounts like a 401 (k), IRA, etc., come out
quarterly or monthly with current information for almost any plan available
via the Internet. Participants in the Presidents plan would need similar
access to their accounts in order to control investments and make changes.
In order to provide that information in a timely fashion, employers would
have to report employee contributions to the government much more quickly
than they report FICA contributions, which are sent in on a quarterly basis.
Even though workers would direct the investment of their accounts
and the funds therein are described as the wealth and property of the
individual, the government is not going to leave the disbursement of these
funds up to the discretion of each individual investor. Workers would not be
allowed to spend their savings all at once to prevent them from ending up
broke and poor, and then looking to the government for aid through a long
retirement. Personal accounts are to provide a steady income through the
retirement years and maybe even a little left over to pass on to family
members and heirs. This bequest option is currently missing from Social
Security (Final Report, 2001) although OASDI provides benefits for the life
of the retiree and for the lifetime of spouses and minor children.
In return for the opportunity to pursue higher expected returns
through personal accounts, individuals who choose the accounts agree to

forgo the benefits that would have been financed by these payroll taxes.
Every dollar invested in a personal account reduces the ability to pay future
Social Security payments by one dollar, plus the offset rate of interest that is
proposed for each plan (ranging from 2 percent to 3.5 percent after
inflation). This is a benefit reduction. The government is giving the worker
the opportunity to accumulate more money than would be accrued through
OASDI, but the worker could possibly accumulate less. Weller and Bragg
(2001) write,
...the Social Security trustees assume that economic growth
over the next 75 years will equal only half that of the past 75
years (1.6% compared to 3%). Given this, we can also expect
lower rates of return for stocks over the next 75 years, 3.5 to
4% to be exact (p. 4).
The personal accounts plan uses a rate of growth per account at 8%;
current interest rates today are closer to 3%; that difference in interest could
result in a loss of hundreds of thousands of dollars. Total expected benefits
to the worker are increased if the compounded interest is 8% or more and
depends on the worker choosing the right investment fund. Lower interest
or a losing investment and the worker will suffer. It is key to the success of
the plan that workers choose their investments not just wisely but
Assume a workers average income for forty years is $35,000.
Annual FICA contributions of 6.2% equal $2,170. Under the Bush proposal,
up to $1400 could be invested in personal accounts; that contribution, based
on 8% interest compounded quarterly, comes to $439,720.71. Assume that,
without a personal account, OASDI monthly benefits would be
approximately $1220 (Social Security, 2005). Multiply that monthly benefit
over ten years, the approximate life expectancy (77 years and assuming
retirement at age 67)) and the total OASDI benefits equal $146,400 (not
including annual COLA increases) plus an additional $73,200 in spousal
benefits if the worker is married for a total of $219,600. (If the spouse has
personal OASDI benefits equal to less than one-half of the partners benefit,
than the spouse collects the greater of the two). If the spouse survives the
worker then 2/3 of total benefits will continue to be paid until death of the
Currently IRAs pay an average of 3.5% interest (Virtual Annuity).
Using all the original information, but changing the interest rate to.3.5%, the
result of forty years investment is $127,926.75. The value of the personal
account has shrunk by more than two-thirds. These are averages and don't

consider the possibility of gains from picking a winner or losses from
investing in the wrong company. Leaving all of your contributions in the
current FICA could be a better investment. Weller and Bragg (2001) write,
The average rate of return from Social Security for all
workers bom between 1956 and 1964 is 2.7%, substantially
higher than the 2% that could be expected from a privatized
system. For women the average rate of return is 3.7% and
for low-wage men it's 4.7% (p. 4).
Withdrawals from the personal accounts could be made in different
forms including inflation-indexed annuities that automatically incorporate
protection against inflation or a flat rate payment. The proposed personal
accounts plan does not consider early death or disability. If a serious illness
or injury demands access to these funds or if a worker is disabled when
young and doesnt have the account built up enough to support the worker
or, in case of early death, the workers family, the Commission defers to
other government agencies. Personal accounts are not to interfere with
emergency or disability assistance the government may provide for a citizen
through Social Security.
In the Commissions report, it is claimed that the transition costs, the
expense of paying out benefits from current income as well as putting as
much as 40% of that income into personal savings, would not cause a
hardship because of the Social Security surplus. The Commission looks at
transition costs as investments and estimates that the current surplus would
be ample to fund both current benefits and new personal accounts.
According to earlier projections of the Social Security Trustees, the program
was expected to run cash surpluses totaling $811 billion in present value
between now and 2016. Those resources could be used to fund the
transition to personal accounts, rather than to finance other government
spending programs (Final Report, 2001). That, however, was written before
tax cuts, 9/11 and the ongoing wars in Afghanistan and Iraq. Now there is
no surplus to fund the transition costs that could be in excess of $2 trillion to
fund the proposed changes in the system. Some experts say that the
government would have to borrow as much as $1 to $3 trillion over the next
several decades to make up for the lost revenues and pay retirees benefits
earned under the old system (Andrews, 2004).

Changing Benefits Structure
The current benefit formula is based on the workers wages and years of
contributions to FICA. It increases from year to year as the workers rate of
wage grows. OASDI averages the workers highest eligible earnings for
thirty-five years and uses that figure to calculate the starting benefit. Any
part-time or low-income job in excess of the requisite thirty-five years will not
be included. If the workers first job was at age eighteen and retires at sixty-
seven, there are almost fifty years of wages to consider. An individuals
income tends to rise faster than inflation. A first job may have paid minimum
wage and a second job, the first rear job, may have paid four or five times
that. Now the President is suggesting that benefits not be based on the
growth of wages, but on the rate of inflation.
In 1995 the maximum monthly benefit was $1199. By 2000, the top
benefit was $1433/month, and in 2004 the highest monthly benefit was
$1784 (Social Security, 2005). The final report would peg the future rate of
growth of benefits within the traditional Social Security system to the same
rate that increases benefits annually: COLA. The individual would still be
taxed according to wages. This change in benefits formula would not
reduce benefits below those paid to todays retirees. While benefits would
continue to increase year to year, they would grow at the slower rate of
inflation. This adjustment could save trillions of dollars in future benefits and
would have no effect on those already receiving benefits and little effect on
near retires (55 and older). Weisman and Allen (2005) wrote regarding this
proposed change:
According to the Social Security Administration's chief
actuary, a middle-class worker retiring in 2022 would see
guaranteed benefits 9.9% lower than if the change is not
enacted. By 2042, average monthly benefits for middle- and
high-income workers would fall by more than a quarter. A
[new] retiree in 2075 would receive 54 percent of the benefit
now promised (p. A01).
All of this ignores the fact that, prior to the 1972 amendment
introducing COLAs, Congress routinely adjusted Social Security benefits to
reflect inflation (Scheiber & Shoven, 1999). The COLA amendment took the
burden of the timing and determination of the increase off the shoulders of
the Congress. If the purchasing power of the benefits decreased
significantly, there is no reason for the Congress not to move, as they had in
the past, to increase those benefits.

An important measure of any Social Security reform proposal to the
health of the Social Security system is whether it can reduce the unfunded
liability (Final Report, 2001). The proposed personal accounts plan could
reduce the size of anticipated cash flow deficits by the end of the 75-year
valuation period that Social Security bases the solvency of the system but
does not eliminate the cash flow shortfall without additional general revenue
by 2075. In other words, personal accounts will not save Social Security.
The final reports projections did not use the rates of return
recommended by the Office of the Actuary of the Social Security
Administration. Those rates, ranging from 3.5 to 6.5, were too low to make
personal accounts look attractive. Instead, the final report used the much
higher rate of return covering the span from 1926 to 2000. This seems
disingenuous since a longer investment period downplays the cyclical nature
of the market, giving plenty of time to recover from down periods. This is
especially true because that seventy-five year span is nearly twice as long
as most workers are in the labor force. For any worker whose retirement
was tied up in a company that failed, Enron, for example, and lost thousands
or even millions of dollars, the history of the stock market growth for the past
seventy-five years was less than relevant.
Women And Personal Accounts. Personal accounts could increase
benefits for widows who also earned high incomes on their own. Currently,
a widows benefits are reduced by between one-third and one half relative to
the total benefits she and her spouse received. With personal accounts, the
high income wage-earner, male or female, would collect the higher benefit
upon the death of the spouse and still have access to all funds in the
personal account. Spouses of below average wage earners would also
have access to the deceaseds personal account. However, is the one
spouse did not work or held a low income job, the assets available to the
surviving spouse would be greatly reduced compared to what is currently
available under Social Security. The benefit suggested in under personal
accounts is based on the assumption that the spouse invested the maximum
of four percentage points and earned the full 8% rate of return presented by
the President. If the spouse invested less or made bad investment choices
the surviving spouse could easily collect less.
Under the current system, a woman who is divorced prior to ten years
of marriage receives no credit toward benefits based on her ex-husbands
earnings. As the average divorce takes place prior to the tenth year of
marriage, this deprives many women of benefits they would otherwise have
received. The reform model offered by the Presidents Commission does
seek to address this problem by dictating that personal account assets

accumulated during marriage, as well as all earnings on account assets
brought into marriage, be split equally between husband and wife in the
event of divorce. This would ensure that divorced women would not leave a
marriage without any assets or wealth. The Social Security system does not
discriminate and the above is true for widowers and divorced men, but it is
generally women who are financially affected by the death of a spouse or
However, because of the redistributive nature of the current system,
women, and, in fact, all low wage earners, will receive lower benefits overall
in the two-tiered system proposed by Bush (Olsen, VanDerhei, Salisbury &
Holmer, 1998).
The Disabled. Disability beneficiaries may not have their full adult
lives in which to accumulate a retirement account, so this is a rationale for
maintaining their traditional benefits. However, if benefits were changed for
retirement but not disability, a worker may see his investments failing and, if
possible, opt for a disability claim. The Commission acknowledges that
leaving Dl (disability income) unchanged ... might lead to an increase in
disability applicants (Final Report, 2001, p. 149). The disability and
retirement programs are closely linked because they serve a unified
purpose: to provide protection against the loss of earnings due to retirement,
death, or disability. The Primary Insurance Amount (PIA) formula used to
calculate benefits is not exactly the same for both programs; disability
benefits are based on the last five years work prior to the disability, while
retirement benefits are based on the highest wages earned over 35 years. If
the gap between future OASI and Dl benefits payable at a given age were to
become large, incentives would increase for workers nearing retirement to
seek to qualify for Dl as a way to maximize income.
Federal Protections
Of Personal Accounts
The Commission declines to guarantee personal accounts because it
would cost too much money on a fiscally strained program. Every public
and private retirement system must continually balance the risks and
rewards of alternative approaches to structuring and financing benefits for
retirees. For example, unfunded systems, including the current U.S. Social
Security system, are sensitive to demographic change, economic
fluctuations, and political risk. The ageing of the population and the

declining ratio of workers to retirees places fiscal pressure on unfunded
systems, leading to the risk to beneficiaries that benefits may be reduced in
order to balance system finances. Personal accounts holding real financial
assets reduce the risk that participants face under an unfunded Social
Security system. The workers own their personal accounts, and they
provide an opportunity to diversify pension investments. However, investing
in capital markets exposes participants to the risk of loss of their pension
assets. Social Security today does not subject individuals to financial
market uncertainty, but in fact protects the retiree from those fluctuations.
The Social Security formula itself can be changed and has been changed in
the US numerous times in the past. This is especially true if the system
continues to face financing deficits and if the currently scheduled benefits
cannot be paid.
The Commission does propose several ways in which personal
accounts could be "insured or "guaranteed including "financial collars,"
where individuals give up some portion of their increased returns to the
provider in exchange for protection from losses below an agreed-upon level.
However, since the Commission did not investigate any of these proposals
to determine the costs or how they would be paid, no particular plan was
recommended (Final Report, 2001, p. 146).
This lack of a guarantee has had an effect on the publics interest in
personal accounts. According to the conservative Cato Institute, a poll
dated May of 2000 showed that by a margin of almost forty points (68 to 30
percent), likely voters favor Social Security privatization (Max, 2000). As it
turns out, the more people learn about the Presidents plan, the less they
like it. A CNN/USA Today/Gallup Poll of 1,006 adults nationwide taken July
22-24,2005, showed 62% of those polled disapproved of Bushs approach
to reform the program (Polling Report, 2005). President Bush and the
Republicans have ignored the true nature of the program, a pooling of
assets to share the risk, and portray it as, or compare it to, an investment,
suggesting a better rate of return is possible using free market methods.
Where Social Security was once a unifying program, assuring the dignity of
seniors, it will be diminished to a situation of the haves and have-nots.
It could be an easy sell for the Republicans. Most Americans have
been in the work force since 1980 and have only known a stock market that
has moved up on average 16% a year (at least until the 2000-2002 bear
market). There are few Americans around to testify to the hardship of the
Depression and the value of Social Security. Today's workers know nothing
of prolonged bear markets. Maybe the tales of Enron, WorldCom (Ulick,
2002) and other financial debacles will be enough to make them turn from
the Republican plan. If their parents cant afford retirement, then who will

pay for it? Without the security of Social Security, where will the elderly
Once workers start diverting FICA taxes into personal accounts the
integrity of the Social Security system will weaken. The ability to pay
benefits will decrease as contributions into the pool decrease and Social
Security will fail. Bushs plan does not guarantee returns on investments nor
does it offer protection from loss. True retirement security will depend on
the workers ability to know and understand the market, to have a good
sense of risk, and, finally, to be very lucky.

The Democrats love Social Security. For seventy years this program
has been a model of success by providing for retired workers and lifting the
aged from poverty. Its their program and they see no need to revamp the
entire system. A far more successful ploy is to let the Republicans threaten
the system thereby sending voters back to the Democratic fold.
Republicans have seen the Democrats use this strategy before and
are trying to prevent the Democrats from succeeding with it this time. After
drilling into the subconscious of every worker that Social Security will not be
there when they retire, Republicans are now trying to paint the Democrats
as a party of no ideas, a party that cant lead because they wont lead in the
charge to strengthen Social Security. The Republicans have thrown down
the gauntlet, as it were, challenging Democrats to come up with a plan to
save the program, as long as it doesnt raise taxes. Another tactic is put up
or shut up. If the Democrats dont have a better idea than the Republican
plan then just keep their mouths shut. This worked when Bob Dole
presented the bipartisan big fix but he was talking to his fellow Republicans
at the time and Ronald Reagan was in virtual hiding. This chapter will
describe and review program changes suggested by those Democrats in the
recent past.
Clinton And Federal Investment
In 1994, President Bill Clinton appointed the Social Security Advisory
Council to look into ways to improve Social Security. The Council came up
with three plans to strengthen Social Security, ail of which cut benefits,
either by raising the retirement age or reducing the benefits paid, all three
plans raised taxes and all three plans introduced some version of personal
accounts (Quinn and Mitchell, 1996).
None of those recommendations were acted on but in
December 1998 President Clinton held a two-day bi-partisan

meeting to save Social Security. The President had ideas to reform
the program that hinged on the growing economy and a government
operating in the black, two conditions Clinton was enjoying at the
time. In his 1999 State of the Union address Clinton revealed his
ideas to save Social Security. The main points of Clintons
proposals were:
Over 15 years, $2.7 trillion in general revenues
would be shifted to the Social Security Trust
Fund to shore it up.
Twenty-five per cent of this new cash would be
invested in stocks. These two elements were
intended to eliminate almost half of the fund's
long-term shortfall.
The government would fund modest individual
401(k)-type accounts, separate from Social
Security. Workers could make additional
contributions, which would be matched, partly, by
Washington (Gleckman, McNamee & Borrus,
Even though this plan included personal accounts and investing in
the stock market, Republicans were opposed to the plan. Transferring funds
from general revenues to the Social Security trust fund eliminated the
possibility of a tax cut which the Republicans wanted. Clintons proposal
also counted on a budget surplus continuing for another fifteen years, which
was considered optimistic at best. Republicans did not like the idea of the
government investing directly in the stock market saying it would give the
government unprecedented control over corporate America even though the
amount to be invested, $675 billion over ten years, was a relatively small
amount, in an $8 trillion economy (Ullmann, 1999). One bonus, if the stock
market fell, the government would take the hit, not the individual investor,
and since benefits were paid out of FICA taxes collected, the system would
not be devastated as an individual could be. Also, a regular flow of
investment capital into the stock market would be good for the economy.

The Gore Plan
While the subject of some discussion, Clintons plan went nowhere
but Vice-President and Democratic presidential nominee Al Gore did
resurrect parts of the plan in the 2000 presidential campaign debates. Gore
had to come up with a plan to fix Social Security because then Governor
George Bush was already touting private accounts for future retirees as the
way to solve the programs anticipated shortfalls, and most Americans
believed the subject was appropriate and important to the debate.
Where then Governor Bushs plans were vague, Al Gore was fairly
specific. Like Clinton, Gore wanted to take advantage of the booming
economy and dedicate the large surplus to debt reduction and putting the
interest saved into the Social Security fund. The more debt the government
pays off as it comes due, the less new money it must borrow to refinance
the remaining debt. The less the government borrows, the more money is
freed to finance consumer spending and business investment. All that
would help assure that the forecast surpluses materialize and become
available to help Social Security as the baby boomers retired (Church, 1999).
The Social Security surplus would be put in a lockbox, that is, dedicated for
a single purpose rather than floating in the general fund and available for
any program that suited the whim of Congress.
Gore did not recommend the government invest in the market to
increase its returns, but he was willing to create voluntary personal accounts
in addition to, not in lieu of, Social Security and they would be tax free, not
tax-deferred. To make these accounts even more attractive to the people,
Gore suggested that the government match a certain amount of savings, up
to $3 per dollar saved depending on the income bracket of the worker, in
essence, a federal 401 (k). This money, separate from Social Security,
would belong to the worker and would be available to pass on to survivors.
In response to Bushs plan to substitute personal accounts for part of the
Social Security system, Mr. Gore said, Social Security isnt supposed to be
a system of winners and losers. Its supposed to be a bedrock guarantee of
a minimum decent retirement (Bush/Gore Debate, 2000).
Gores plan recognized that women workers who take time off to
raise their children dont fere as well under the current Social Security
scheme. This showed respect for family values so touted by Republicans.
"Giving women credits for caring for children is important for all women who
will draw benefits in the future from their own work," said Heidi Hartman,
director of the Institute for Women's Policy Research. "It would be the first
time that the Social Security system would recognize the value of care-

giving, something the women's movement has demanded for a long time
(Weisbrot, 2000, p. 1).
Gore suggested a Motherhood credit of $16,500/year for up to five
years that women took off of the workforce to raise a child (Timmins, 2000).
This is significant because, not only do these women lose income by sitting
out of the workforce, they lose earning power. Nevertheless, they are not
paying into FICA the years they sit out, so this credit would be a gift from the
government. Finally, Gore saw the loss of a third of household income too
great for widows, in particular, to bear, and recommended spouses benefits
be increased to three-fourths of the total household benefit, up from the
current maximum of two-thirds.
According to Gore, all of this would cost about $200 billion over ten
years, and he claimed that continuing the prosperity enjoyed under Bill
Clinton, and maintaining a balanced budget would ensure the budget
surplus that would pay for it (Bush/Gore Debate, 2000). He believed his
plan would keep the program in good shape until at least 2050. Gores plan
sought to appeal to almost everyone. It did not raise taxes but instead relied
on increased revenue due to economic strength and prosperity. It all but
guaranteed the solvency of the Social Security system for fifty years, though
this was never debated much less proven. It offered personal accounts in
addition to Social Security and finally, it improved benefits for women.
Federal matching of contributions to savings was a bonus for lower income
families but wouldnt have benefited higher income families, but they could
opt out of those personal accounts since they would be voluntary.
Kerrys Stance
When John Kerry ran for the presidency in 2004, he did not embrace
Gores plan for a number of reasons. The surplus Gore planned to use was
gone and the federal debt had ballooned. The economy had slowed down
considerably. With the war in Iraq looking like a big mistake and the
economy not doing well, Kerry may have judged that a plan to reform Social
Security wasnt necessary for the campaign. So he offered no plan. On his
now defunct presidential campaign website, Kerry said he would do
whatever is necessary to solve the Social Security problem. On his
Senate web site, John Kerry wrote:
While changes are necessary to guarantee Social Security's
long-term solvency, reform should not be used as an excuse

to decimate the structure of a program that has ensured a
secure and independent retirement for millions of Americans.
I will continue to work with my colleagues to protect the
interests of working Americans preparing for retirement as
well as the principles of fairness and security for our older
loved ones (Kerry, 2005).
In a primary debate, John Kerry said, I will never privatize Social
Security. I will never try to extend the retirement age for Social Security. And
I will not cut any benefits for Social Security" (Team NCPA, 2004, p. 1). So
Kerry would do nothing.
This is where Republicans have the advantage. With no Democratic
plan to reform Social Security to challenge, the Republicans criticize the
Democrats for not having a plan, for not having ideas and, consequently, not
able to lead. The Democrats have no plan to reform Social Security. They
have, instead, a plan to denounce the Republican plan to introduce personal
The Democratic Position
While prominent Democrats like Senators Harry Reid and Hillary
Clinton offer no plan to Tix Social Security, their web sites contain a litany
of whats wrong with the Bush plan. They complain Bushs plan is too
drastic. They argue that the so-called "crisis is years, if not decades, away;
that there is plenty of time to find an equitable solution and they stress the
obligation to help seniors retire with dignity (DeGette, 2005). The
Democrats must counter Bushs plan of individualism and emphasize how
seniors and their families have benefited from Social Security (Williamson,
McNamara & Howling, 2003). This should not be difficult. According to Dr.
Juanita Miller, nearly 11% of the elderly, those over age 65, currently live in
poverty. Compare that to the over 35 % who lived in poverty in 1959 (Miller,
n.d., p. 2).
It is essential for the Democrats to stress the lack of private and
employer funded pensions available for todays worker and the low rate of
participation in those plans to show how necessary Social Security is to
young workers. The failed pension system of the United Airline employees
is a prime example. As part of its bankruptcy reorganization plan, United
Airlines asked the court permission to hand over the companys pension
obligations to the government's Pension Benefit Guaranty Corp (PBGC)

(Pierceall, 2005). This will result in a tremendous reduction in benefits to
current workers and especially to those already retired. Airline pilots are
required to retire from flying at age 60 (ALPA, 2005). PBGC has a limit on
benefits ($3,801.14/month as of 2005) and reduces benefits for early
retirement (PBGC, 2005). A 62 year old pilot, retired two years ago and
receiving $12,000/month in pension will see his monthly benefit reduced to
$2000/month {Denver Post, 2005).
It is unfortunate that the Democrats have not offered a viable plan to
reform Social Security. Polls show that Americans have more faith in the
Democratic party to make the right decisions about Social Security than
the Republicans by a margin of 48% to 31% (Polling Report, 2005). The
Democratic Partys failure to come up with a plan for Social Security doesnt
necessarily represent a lack of ideas; it could be good political strategy.
After the big fix of the Reagan administration, Republicans suffered in the
next election and lost a number of seats in the Congress in part due to their
actions during that reform (Scheiber & Shoven, 1999). As President Bush
has toured the country promoting his personal accounts plan, support
among the people (and the Congress) has waned as they understand the
benefit cuts and risks involved in the Presidents plan (Weisman, 2005).
The Bush plan could cost in excess of $2 trillion, and the surplus no longer
exists to fund it. A survey taken after the 2000 Gore/Bush election showed
that those polled preferred Gore's plan to boost Social Security with the
budget surplus to Bushs plan to dedicate the surplus to tax cuts
(Wattenberg, 2004). It seems logical to wait till at least after the midterm
elections of 2006 for the Democrats to take a stance on Social Security
reform. And when they do they will have to come up with something
innovative since there is no budget surplus to foot the bill.
The Democrats accuse Bush of trying to dismantle the Social
Security system and of abandoning the promise to all working Americans to
retire in dignity. Democrats believe that Government has a crucial role to
play in insuring the well being of its citizens; Republicans hold to the idea
that government need only lay the groundwork and citizens can take care of
themselves. This difference in ideology is at the root of the party differences
on Social Security reform. Williamson, McNamara and Howling (2003)
assert that the Republican plan is motivated by the ideal of rugged
individualism and the idea that each generation should provide for itself (p.
2). They call it age warfare and it can be seen in Bush administrations
claim that Social Security wont be there for the younger generation
(Cheney, 2005).

The politicians of the United States are not the first to see
demographics and ideology as reasons or even opportunities to change
Social Security. This chapter will discuss the efforts at Social Security
reform in Chile, China and Great Britain. Each of these governments has
tried some form of privatization of Social Security. The Chilean government
has placed the onus of retirement security totally on the worker, relieving the
employer and the government of responsibility for the workers retirement.
Since its market has expanded into the West, the Chinese have created a
system that taps on contributions from the government, the employer and
the employee to guarantee a secure and generous retirement for the worker.
In Great Britain, a privatization program that is very similar to the plan
suggested by the Bush Administration has already been established. Their
experience could be a roadmap for the pitfalls the United States could face if
Bushs plan is enacted.
The Chilean "Ideal
When governments want to propose private retirement accounts they
point to Chile, a nation that thoroughly privatized retirement accounts nearly
thirty years ago. In the 1980s, Chile could be described as a third world
country controlled by a military regime with an emerging economy and,
mentored by economists trained at the University of Chicago Department of
Economics, just bold enough to embark on a neo-liberal retirement program
that much of the industrialized world has come to admire and idealize
(Benjamin, 2004).
With a scattering of pension plans throughout its history, the Chilean
government enacted a national retirement program in 1925 (Borzutzky,
2002). It was a national plan in that the government contributed funds as
did employers and some employees. It was neither universal nor equitable.
Employees contributions ranged anywhere from 0 to 52% depending on the

sector, value and power of that group. The privileged position of certain
groups, enhanced, apparently by their close relations with certain members
of the Congress, gave copper workers and even race track workers,
exclusive funds with extraordinary benefits. There was even inequality
within groups because some pensions could be based on the position held
and determined accordingly by the last years salary or on the last thirty-five
years salary or something in between (Ibid).
The copper industry produces about 80% of Chiles exports (Ibid).
Therefore, copper miners had considerable power when demanding more
and better benefits. The hacienda owners, who had the money and
therefore the power to deny the laborers any benefits, outmatched rural
workers who labored on the hacienda. Chiles workforce was divided
between formal and informal worker, urban and rural, those laborers
important to the international economy and those who were not. Each group
could be and was used to political advantage; benefits were often promised
in exchange for votes, so that the urban workers, being more likely to have
access to the polling place, were more likely to see benefits. By the time the
privatization plan was enacted there were over 150 different pension
programs in the Chilean system.
Under the control of General Augusto Pinochet, the Chilean
Government made the dramatic move to privatize Social Security. In a
situation similar to the one the United States government is facing today,
Chileans were paying higher and higher taxes into Social Security because
the number of workers to retirees was dwindling. In 1955 there were twelve
workers per retiree, twenty-five years later there were only 2.5 workers per
retiree contributing to the system. Its no wonder that prior to the sweeping
changes in the retirement program, taxes were extremely high, with total
contributions by employers and employees, approximately 26% of wages.
Added to that was the gross inequality of benefits paid to retirees. Under
the guidance of University of Chicago trained economists, and with no public
discussion, Pinochet introduced the privatization of Social Security in 1980.
As President Bush does today, the Pinochet government regaled private
accounts as the best way to solve the pension system problems, claiming,
as Bush does, that private accounts invested in the market would create an
ownership society and eliminate poverty (Edwards & Cox, 2002).
Unlike the system proffered by Bush, the pension system in Chile is
mandatory for workers in the formal sector, about 62% of the workforce in
Chile. The other 38%, the self-employed, seasonal and otherwise informal
sector, may contribute if they want and about 4% do participate to some
extent. These private accounts are managed by a privately managed
system of companies known as Administradoras de Fondos de Pensiones

(AFPs). Participants choose which AFP will manage their retirement funds
and can transfer them to different management firms. The system also
includes a survivor's term life insurance element as well as a disability
program funded with an additional insurance premium. The state regulates
and monitors the management companies and guarantees a minimum
To make the reform package attractive to workers the employee
contribution was lowered to 10% of wages and tax deferred. Workers were
excited at the thought that the money they contributed was earmarked for
their own retirement, under their control and not lumped together with
monies of every other worker and in the control of the government. As a
result, those individuals who joined the new system experienced an average
increase of net take-home pay equal to 10%. In addition, the employer
contribution was eliminated. This was done to allow employers to pay
higher wages, but more importantly to enable them to compete in national
and international markets (Lear & Collins, 2002).
To ensure some level of income for retirees, regulations impose a
floor on the return that individual AFPs pay to their members. An AFP
guarantees a 2% return on the workers investment. If the investment does
not earn the required 2%, then the difference must be made up from funds
held in a special reserve fund.
Retirement age in Chile is 65 for men and 60 for women, but they can
retire earlier if they have enough funds to finance an early pension. Even if
a woman has the same amount of money in the fund as a man, she will get
a smaller pension check because women retire earlier than men and they
live about seven years longer than men so their pensions have to stretch
further. There are two systems from which they can choose: the retiree can
buy an annuity from an insurance company with the accumulated funds or
enroll in a "programmed withdrawal" scheme, in which the accumulated
funds are drawn according to a schedule based on life expectancy.
The government also provides, for those individuals who contribute a
minimum of 240 payments (20 years) into the system, a minimum pension
guaranteed by the state, which as of December 1998 was equal to 85% of
the minimum wage, currently about 67,000 pesos, or US $96/month
(Edwards & Cox, 2002). If the worker does make payments but doesnt
make the minimum then that money is still held as a retirement account, but
the worker will not receive the government subsidy. With unemployment
near 21%, many Chileans wont qualify for the minimum pension (Lear &
Collins, 2002). The total coverage of the plan is low with only 62% of the
working population included in the plan. In 1973, by contrast, over 75% of
working Chileans were covered by the social security system (Ibid). The self

employed are not required to join, as they are in the United States, and
there is no incentive to make them want to join. Many pay only the minimum
to get some protection in retirement (Ibid). Of all workers enrolled, only
around 44% pay regularly into the system.
The privatization program is expensive to run. From 1974 to 1980,
the cost to the public treasury of maintaining the public, albeit inequitable,
system averaged 2.4% of GDP. Since the creation of the system of AFPs,
which the government must regulate, it must also continue to pay for those
retirees in the old system while not collecting taxes from those workers or
their employers in the new system. Plus the government must pay a
"recognition bond" for the contributions of those workers who switched to
the new program and transition costs, which creates a further drain on the
public treasury. The government also has an open-ended commitment to
supplement inadequate pensions and guarantee against bankruptcy,
mismanagement and fraud among the fund managers. The cost of
maintaining the public and private systems has averaged 5.7% of GDP,
representing 42% of the government's social spending and 27% of total
spending. With fees, commissions and other expenses representing about
10% of contributions, the money left for pensioners is reduced. For the low-
income worker, in the first few years, fees are so high that real returns after
fees are actually negative (Ibid). According to the government's
Superintendent of AFPs, when fees are factored in the average rate of
return on the retirement fund of someone earning the monthly minimum
wage drops to 7.4% for 1981 to 2000, and to a modest 3.7% rate of return
for 1994 to 2000 (Ibid). AFPs employ 18,000 salesmen, one for every 300
formal workers, and their job is to lure the worker into a different AFP. The
fees and the investment vehicles are the regulated by the government so
there is no financial advantage to change for the worker, but the AFP gets to
add on more fees to cover the cost of the switch {The Economist, 1997),
More importantly, the privatization program has not resulted in an
increase in retirement wealth. Government workers are learning the hard
way that retiring on the market is not always lucrative. One worker who
switched in 1980 would, If she retired now, receive a monthly income of
159,000 pesos (US $227), a mere 22% replacement of her current income
of salary of 727,000 pesos /monthly (US $1040). Under the old system, she
would have retired with a monthly income of 650,000 pesos, US $930 (Lear
& Collins, 2002).
In Chile, those opting for early retirement are becoming the fastest
growing segment of its society. Retirees could number three million, or 16%
of the population by 2018. Despite private accounts, the government still
has a commitment to those whose private pension funds will not guarantee

a secure retirement {The Economist ,1998). If Chile reforms the pension
plan again, it is possible that it will completely eliminate the requirement of a
minimum number of contributions, thereby guaranteeing a minimum
retirement income from the state to everyone who contributes to an AFP.
The government needs to address the fundamental issues facing the private
social security system: high costs to contributors, the power and profit of
AFPs, the vulnerability of retirement savings to market fluctuations, and the
likelihood that half the working population will not be able to retire without
help from the state.
The Chilean privatization scheme for pension reform has made the
worker and the government responsible for the retirement security of the
worker and allowed the Chilean business community, the segment that
derives the most benefit from the labor of the people, to proceed without
any obligation to those workers.
In the United States, politicians are panicking at the thought of 77
million baby boomers retiring and unsettling the Social Security system. The
Chinese wish they had that problem. By the year 2020, China expects to
have 200 million retirees, and 300 million by the year 2050 (China White
Paper, 2005). Here, demographics have been altered by the state. In an
attempt to slow down population growth, the Chinese government enacted a
one child per family policy, which automatically reduced the future work
force and made China the fastest ageing nation in the world.
After the 1949 Revolution, the government adopted a method for
handling governmental duties at the local level. National or centralized
authority came into play only at a time of emergency or when more than one
region was involved. The main economic security for Chinese urban
workers that came from the state was inflation control and guaranteed
employment, the iron rice bowl (Be' Land and Yu, 2004). Additionally, the
pension system was limited in coverage to mainly state workers and party
members (West, 1999). When first established in the 1950s, the pension
system for state employees offered lifetime pensions upon retirement to
women and men with a record of at least 20 years employment. Few state
retirees qualified for pensions until the 1970s, right around the time China
began to open its doors to foreign investment and markets (Ibid). The influx
of private enterprises created a demand for an expanded pension system.
In 1978, state pensioners, those who worked in state owned enterprises

(SOEs) numbered only slightly more than 2.8 million, accounting for 90 per
cent of all pensioners. In that same year, the eligibility requirement for a
pension was reduced from twenty years of work to ten years of employment,
partly to encourage retirement and free up jobs for young unemployed
adults (Ibid).
In China, 70 per cent of the population is still rural (Gao, 2005). In
those areas, reliance on family support in retirement continues. The
government does provide a safety-net provision for the destitute elderly
with no family (China White Paper, 2005). In 2003, only 2 million farmers
were reported as drawing old-age pensions.
To facilitate foreign investment, the central government has invested
enormous amounts in the coastal cities, building new infrastructure and
introducing tax concessions while taxing the rural Chinese to finance the
work (Gao, 2005). In return, the central government has spent little on rural
education or healthcare or, what is relevant here, pensions. While the
government had done little to develop comprehensive pension programs in
rural areas, it did establish a pension system for urban workers through the
State Council Regulations on Labour Insurance. The system applied to
SOEs with more than 100 employees. Right off the bat, the government
was delineating (or dividing) its workers between urban and rural, large (or
economically important) and small businesses
The liberalization of eligibility criteria contributed to a rapid increase in
pensioners and led to a sharp decline in the workers-to-retirees ratio from 30
state and urban collective workers for every pensioner in 1978 to only 13
just two years later. State pensioners more than doubled from 1978 to 1980
and doubled again by 1986. Add to that the considerable increase in life
expectancy and the early age for retirement (60 for men, 55 and 50 for
women, depending on membership in the Communist party), and pension
reform is suddenly an important social and political factor in China. As a
Communist nation where the government was seen almost as a father
figure, BeLand and Yu (2004) write that the
... Chinese retirees often consider public pensions as a
symbolic recognition by state and firm of an employees
years of devoted service as well as a vital source of support
for those who are too old to work (p. 276).
China had decentralized significant areas of administration, and the
Chinese state was incapable of managing a coherent and centrally
regulated public pension system. Pensions systems throughout China were
destined to be truncated and unequal. Enterprises that were more profitable

were easily able to fund the pension programs; enterprises that were not as
successful borrowed from the local and central governments in order to
meet their obligations.
Since the 1970s, the government has made large economic shifts
towards the free market and privatization. These new economic measures
have created forces in the emerging private sector that have rebelled
against pension systems that require total funding by the employer.
Chinese policies cannot help but be influenced by the neo-liberal, that is,
free market, paradigm of the nations it seeks to court.
The old age pension system was originally a PAYGO (pay as you go)
system, financed entirely by the employer with loans from the state when
necessary. Pensions paid by SOEs averaged 70% of employment income,
below the original 80% rate, but still generous. As private enterprise began
to emerge there were serious discrepancies that emerged as well. SOEs,
having been established for many years, already had a sizeable number of
retirees receiving benefits. The newer private businesses tended to have a
younger work force and therefore fewer retirees. Chinese economic growth,
fueled by foreign investment, was such that u[b]y 2002, the private sector in
China accounted for 33 per cent of the countrys GDP, compared to a share
of 37 per cent by the state-owned enterprises (BeLand and Yu, 2004, p.
276). That much strength in the economic arena tends to give the private
sector strength in the political arena, even in a Communist state.
Pressure from private enterprises was influential but an equal, if not
greater factor was the fact that SOEs were becoming losing propositions,
not able to pay the benefits due to their retired employees and borrowing
more and more from the government at one level or another.
The dilemma for the Chinese government is that the fragmented state
makes it impossible to engineer any kind of reform without the support of
local and regional authorities. It means constant bargaining between
individuals and organizations and the various levels of governments.
In 1991, the State Council proposed a three-tier retirement insurance
system for employees in urban enterprises. This system would include
components financed by the state, the enterprise and the individual. This is
the first time the individual employee was expected to contribute to
retirement plan. In 1997 the Chinese government came up with a national
retirement program: Decision on Social Pension System. It stated that each
enterprise would contribute a maximum of 20 per cent of the total wage
towards pension funding. Individual workers would pay 11 per cent of their
wages into their personal accounts. This plan covered a limited portion of
the total population and excluded rural workers. Even though workers
contribute funds to a personal account, those funds are not isolated from

other pension contributions and are often tapped into in order to meet
current benefit payments. Since 1999, more than 1 trillion Yuan has been
taken away from individual accounts to pay for existing pensions.
Because the Chinese government has decentralized so much of its
authority and given so much power to the local and regional governments
the central government lacks the administrative capacity to uniformly collect
taxes from both private and public enterprises. The central government
must create a more effective administrative and supervisory infrastructure to
operate what is the worlds largest pension system. The failure to create
that infrastructure to guarantee the economic security of urban workers and
retirees, could result in social unrest that could undermine the authority of
Chinas party-state.
In 1997, the Chinese government unified the basic old-age insurance
system for enterprise employees in urban areas across the country by
implementing a social-pool-plus-personal-accounts scheme. The idea of
this pool was that enterprises that did not have a lot of retirees pooled
retirement funds with companies that did, sharing the burden. That took
pressure off the local governments that had been paying out funds when
companies couldnt manage the expense. This old-age pension consisted
of two parts: base pension, equal to about 20 percent of an employee's
average monthly wage in that area in the previous year, and pension from a
personal account. The monthly pension sum from the personal account is
1/120 of the total accumulated sum in the personal account (11 percent of
an employee's wage being deposited every month in the pension section).
The state adjusts the basic old-age pension based on the price index of
living expenses for urban residents and employees' pay increases (China
White Paper, 2005).
In 2001, the Chinese government began to carry out pilot projects
that gradually established personal accounts. Individual employees pay
eight percent of their wages as premiums and self-employed individuals and
those who are employed in a flexible manner in urban areas pay an amount
equal to about 18 percent of the average wage in their area. The
government is responsible for the increase in funds as needed for cost of
living adjustments. In addition to participating in the compulsory basic old-
age insurance, enterprises may set up annuities for their employees to
which both enterprises and individuals will contribute. The fonds are strictly
for retirement purpose and managed in the form of personal accounts.
China began to try out an old-age insurance system in some of the
rural areas in accordance with the actual level of local socio-economic
development. In this system the workers pay premiums which are
supplemented by enterprises and the funds are pooled. This is very much

an insurance concept where the funds are pooled to share the risk (West,
1999). The government has effectively shifted the responsibility of old-age
insurance from the Communist government supported enterprises to a
combination of the government, all enterprises, local communities, and the
individual worker with the establishment of personal accounts.
The Chinese continue to work on designing a basic retirement plan to
provide a minimum standard of living for retirees financed by enterprises,
employee, and government through a combination of pooled funds and
individual accounts. This social basic plan has two components: a defined
contribution plan with an individual account established for each worker, and
a defined benefit plan known as the social pension, based on a social
pooling account. The relative emphasis on the two components varies by
Benefits under the defined benefit plan end with the death of the
pensioner. Because there is a very high labor force participation rate among
both males and females in urban areas, spousal and survivor benefits were
not viewed as important. Most provinces are specifying that employee
contributions to the individual account are inheritable but often not the
portion contributed by the enterprise.
With so many future retirees, the Chinese government is developing
a system that incorporates contributions from government, employer and
employee that will leave no pensioner destitute but will, in fact, guarantee at
least 80% of their working income, at least for the urban worker.
Great Britain
In 1945 Lord Beveridge introduced a cradle to grave social security
program designed to protect Britons at every stage of their life (Perkins,
1946). After decades of these welfare state policies, Prime Minister
Margaret Thatcher initiated programs designed to reduce if not eliminate
public dependence on the government. Thatcher introduced two major
changes in pension policy. Just as President Bush is now suggesting in the
United States, beginning in 1981, the basic state pensions in Great Britain
were no longer indexed to wages but instead to price increases. This
change slowed annual increase in benefits. Then, in 1986, workers were
able to invest part of their payroll taxes in the stock market.
While over five million British workers opened personal accounts the
system has been rife with complaints of high fees, high pressure from
pension salesmen and bad financial advice. Even worse, employers often

did not contribute to the private plan, so the principal was lower than in state
pensions. Fees were very high, in some cases as much as 25% of the
account value. While this plan to partially privatize the pension system did
reduce government expenditures for retired workers, the private system did
not grow enough to make up for what the government would have paid out
(Despeignes, 2005). Employer-funded pensions are an important part of
retirement security in Great Britain; as many as 48% to 53% of British
workers are part of an occupational pension plan. These plans encouraged
the worker to stay on the job because these pension plans are usually not
transferable. Because of this lack of portability and the decrease in the
value of state pensions, many workers saw the private pension plans offered
by Thatcher as a better way to prepare for retirement (Loretto, White &
Duncan, 2001). The number of workers who contribute to occupational
pension plans has dropped to 40%, even though more and more retirees
depend on occupational and private pensions today due to the decrease in
state benefits (Bardasi, Jenkins & Rigg, 2002). Employers tend to
contribute no more than 10% to an employees retirement plan. Sadly, in
Britain, retirement is becoming synonymous with poverty, in 1999, more
than 30 per cent of retired people were in the poorest percentile. Compare
that to 10% in the U.S.
According to Loretto, White and Duncan (2001), surveys of workers
reveal a significant problem in the U.K in that most workers do not
understand the pension system, retirement options, benefits or even the age
a worker is eligible to retire (65 for men, 60 for women). Perhaps education
would help. If, as in the U.S., workers received an annual statement
showing them the state benefit they would receive as retirees they might feel
more pressure to save on their own (Economist, 1998). As it stands now,
most workers think their benefits from the government are anywhere from
50% to 100% more than they actually are.
In addition, personal accounts apparently did not bring out the best in
the various investment and insurance companies that sold accounts to
British workers. After an investigation by the financial services regulator, it
was discovered that a large number of pensions had been sold to those who
gave up their employer sponsored pension for a personal account and
ended up worse off in retirement as a result. The government ordered all
those who had been made worse off as a result of mis-selling be
compensated by the investment company. Almost 1.7 million people sought
and received compensation that ultimately cost the insurance industry 12
billion [pounds sterling] not to mention the hundreds of millions paid out in
fines and penalties (Cohen, 2005).
Now there are calls to revamp the system and the same partisan

arguments heard in America are being heard in Great Britain (Cohen, 2005).
With so many at or near retirement, the so-called grey vote is a vote worth
wooing. While the Labour party is not considering a return to increases in
benefits attached to wage increases, it is considering instead a second
state pension aimed at the poorer workers. The Labour party denies the
viability of private schemes to ensure a wealthy retirement. Incredibly, it
seems that some British politicians are suggesting that the government
create a pension system similar to the U.S. pay as you go plan (Simpson,
1995). Such a system, with the younger, working generation, paying to
support the elder, retired workers, with the trust that the next generation will
do the same, is considered an act of solidarity and really reaches out to the
socialist element of British society. The Labour party also calls for an end to
the tax cuts for the richest segment that was supposed to lead to the
creation of new jobs but apparently didnt.
Britons face the same demographics as do the rest of the
industrialized nations: longer lives and lower birth rates mean fewer workers
to tax to support government paid pensions. By 2030, the number of people
in Britain who are 65 and over will increase by more than half ( 2000). The number of workers who opt for early retirement has grown, with
a large segment of workers thinking of early retirement as a right (Bardasi,
Jenkins & Rigg, 2002). Even without early retirement, people can expect to
spend up to a fifth of their lives in retirement and depending on pensions for
support (Economist, 1998). Since benefits are now tied to inflation rather
than wages, the benefits over the coming years will shrink even as the
economy grows (Economist, 2000).
The Conservatives believe that a welfare state is unaffordable and
prefer a fully private system, allowing younger workers to opt out of the state
system entirely. The transition costs would be excessive since the
government would no longer have those tax dollars to fund current retiree
benefits. Relying entirely on the market to provide retirement benefits with
no government safety net seems overly sanguine to say the least..
These three nations have each approached Social Security reform in
three different manners. The Chileans have fully privatized the program but
have left out nearly two fifths of the workers. Each worker is responsible for
his or her own retirement. The worker has more money in terms of a
paycheck since actual contributions to a pension fund is set at 10% rather
than the average of 26% experienced before the reform. But too many
workers are left out of the system, as politics still allows certain workers,
such as seasonal worker, to be left out. The AFPs, with very little control
from the government, are expensive with fees eating a lot of the workers

early contributions. The choices of where to invest are limited and success
depends entirely on the overall growth of the economy. There is no plan to
assist women in retirement and in fact, women tend to suffer in retirement
because they live longer than men. Many retirees in Chile are finding
retirement is synonymous with poverty. Because of this, the government
must now finance the old age pensions of a significant number of retirees.
What is most disturbing in Chile is that the employer has absolutely no
obligation either to the employee or to the government in preparing or
financing retirement of the worker.
The Chinese government has implemented a plan that incorporates
participation of the government, the employer and the employee with the
understanding that it is the ultimate responsibility of the government to
support retired workers when their pension funds run out. Since so many
women work in China, there is no plan to support the surviving spouse, but
women are not penalized for enjoying a longer life. Because private
accounts are held by the local government in most cases, those
governments can and do use funds from personal accounts to pay debts
that are currently due. This practice could lead to losses for the worker but
more likely for the government which will have to step in and make up for
the shortfall.
Reformers of Social Security in the United States could probably
leam more from Great Britain than from Chile and China since the personal
accounts scheme there is most similar to the program Bush is endorsing.
The result in the Great Britain has been a decrease in the retirement
benefits to retired workers and a general dissatisfaction in the way the
privatization program is run. It is significant that private pensions offered by
employers, once the prevailing retirement force in that country, have
decreased significantly. With government benefits shrinking because
benefit growth has been tied to inflation, seniors relying on personal
accounts means that more and more retirees are struggling to survive.
The experiences of Chile and Great Britain also show how vulnerable
the worker is when left to the devices of investment/insurances companies
eager to benefit from private accounts. In the United States, the investment
houses of Wall Street have been silent on private accounts and their
lobbyists have not been pressuring elected officials to push for these
accounts (Borrus, Woolley, Brady & Thornton (2005). But private accounts
would be a windfall for Wall Street with a tremendous influx of money and
customers (Ibid).
Social Security reform in the United States must include a plan that
reflects the contribution women make both at home and in the workplace; it
must acknowledge that employers have a responsibility to help workers

prepare for retirement; it must acknowledge that the government, as the
greatest beneficiary of a working America has a duty to ensure the welfare
of its retired citizens.
If the United States government can learn from these programs, it
must be that pension reform ensure adequate pensions, improve incentives
to work and save, and be affordable (Economist, 1998)

With so many Americans approaching retirement, it is understandable
that the Social Security system has come under much scrutiny and debate.
According to the U.S. Department of Labor, only 42% of Americans have
determined how much they need to retire (Labor, 2004). Its not as if
Americans dont have the opportunity to save for retirement, many
Americans just dont take advantage of the occasions presented. Christian
Weller (2005), senior economist at the Center for American Progress and
Edward N. Wolff, a professor of economics, write, Despite large tax
incentives from the federal government for workers to save for retirement,
more than one-fifth of households nearing retirement (those between the
ages of 56 and 64) had no retirement saving other than Social Security (p.
2). Data from 2001 indicate that thirty per cent of those workers offered a
401 (k) plan did not participate. In fact, Americans arent saving at all; the
national savings rate, which had been at a low 1.8% in 2004, dropped to
zero in June of 2005 (Pender, 2005). Americans are not preparing for
retirement, and the average American lives for about eighteen years in
retirement (Labor, 2004).
What Is Needed To Retire?
A significant number of Americans have not determined how much in
cash and assets they will need to retire. Two things must be considered:
how much will be needed annually to support the retiree and how many
years will the retiree live. Neither is simple.
To calculate the annual expenditure during retirement, the worker can
automatically deduct work-related expenses such as wardrobe,
transportation, FICA taxes and pension contributions. The worker may even
have paid off the mortgage on the family home and that would reduce
annual expenses. On the other hand, there are expenses that would rise,
especially health care. Illness, surgery, prescriptions, long-term hospital,

hospice or nursing home care are all potential expenses for a retiree. Once
retired, what activities would replace work? Travel, golf or almost any hobby
would entail some expense. Finally, inflation must be considered.
Whatever ones lifestyle, it is generally accepted that retirement income
should equal about 80% of ones pre-retirement income (AXA, n.d.).
Clearly, Americans are not preparing for retirement.
Longevity is the second issue to be considered. According to the
most recent findings, the Social Security Administration advises that the
average male, upon retirement at age 65, can expect to live until age 78, the
average female until age 82 (Social Security, 2005), but it is not
unreasonable to envision an even longer lifetime given the improvements in
healthcare we are enjoying today. The longer the life, the greater the assets
needed for retirement, unless one is prepared to be a burden on the family
or live in poverty during the final years.
If Americans are not preparing adequately, if at all, for retirement,
then what are they counting on to support them in those years? Weller and
Wollf (2005) write,
For the typical person approaching retirement, the value of
expected future Social Security retirement benefits represents
the largest single source of wealth. That finding is consistent
with the well-known fact that Social Security provides more
than half of all income for about two-thirds of people over age
65 (p. 1).
Since Social Security is so vital to retirees, this thesis will now
consider the prospects for the Social Security program.
Prospects For Social Security
For those depending on Social Security, longevity is not a
concern. Social Security will continue to pay benefits as long as the
retiree is alive and will, in fact, continue to pay those benefits to a
surviving spouse as long as the spouse lives. While retirement is the
focus of this thesis, Social Security also pays benefits to the minor
children and surviving spouse of those workers who die before
Retirees are also protected from inflation with Social Security.
Prior to 1975, Congress amended the Social Security Act numerous

times to raise benefits to keep up with inflation until Nixon added
automatic COLAs each year.
Social Security is universal. There is no means testing, no
qualifying, and no rejection. Whoever paid into the program for the
requisite ten years is entitled to benefits upon retirement.
Social Security has raised a significant number of Americans out
of poverty. Without Social Security, almost half of all retirees and their
spouses would live in poverty (Furman, 2005).
Social Securitys Shortfall
Social Security is a pay as you go plan. As tax revenues come
in, benefits go out. Since the upcoming wave of baby boomers that will
soon begin to retire is so much larger than the generation to follow,
there will not be enough workers paying taxes to support retirees at
promised benefit levels. According to the Social Security
Administration, the program will have to reduce scheduled benefits by
26% starting in 2041 (Social Security,2005).
It might be of interest to note that while 76 million babies were
born in the eighteen-year period following World War II, 72 million
babies were bom in the eighteen-year period between 1980-1998
(Friedland & Summer, 1999). This larger generation could be the
solution to the Social Security shortfall or it could be indicative of a
cycle of large/small generations that will plague the program.
Solving The Problem
To solve this problem, President Bush has endorsed a reform
that would erase many of the benefits of Social Security and wouldnt
correct the shortfall. Taking money out of the Social Security program
and putting it into personal accounts would further reduce the funds
available to pay current and future obligations to a program already
facing a shortfall.
Because the tax the worker withheld to put in a personal account
would be separate from the funds held by Social Security, that worker
would lose the risk sharing benefit of the federal program. There would
be no guarantee of benefits should the investments fail.

The worker would be put in the position of estimating his or her
longevity and calculating how much money would be needed for a
comfortable retirement including the cost of inflation. There is no cost
of living adjustment attached to personal accounts.
In an attempt to protect the investor/worker, under the Bush plan
the government would select the companies available for investment,
limit the money to be invested, and control how the money would be
disbursed; the only thing left to the investor/worker is the risk.
Social Security redistributes wealth so that those at the lower
income levels get a greater replacement of their wages than those at
the upper level. Personal accounts would erase this. A worker earning
$20,000/year would have, at most, $800/yearto put in a personal
account (4 percentage points of 6.2% FICA). That worker would not be
allowed to begin investing until $5000 had been accrued and that
would take over six years. Another worker earning $75,000/year would
accrue $5000 in less than two years ($3000/year). Not only would the
higher paid worker be able to start investing sooner, but also have the
advantage of the larger gross amount available to invest shows that
personal accounts favor the well paid worker.
Raise Taxes. The most direct way to solve the shortfall problem
facing Social Security is to raise the payroll tax. A minimal increase of
a 1.9 percentage-point increase in the existing payroll tax would make
the program solvent for a 75-year span (Economic Snapshot, 2005).
But President Bush has said he will consider any suggestion to reform
Social Security except to raise taxes. Perhaps Americans have
reached the limit of acceptable taxing for old age pensions (Howse,
There are other ways to increase revenues. At a salary of
$90,000/year ($94,200 in 2006), a wage earner pays 6.2% or $5580 in
annual FICA taxes. A worker who earns $95,000 pays the same
$5580, but that sum represents 5.87% of income. To stretch the point
a little further, a person with a salary of $115,000 per annum still pays
$5580 in FICA taxes, but that sum now represents 4.85% of wages. In
2005, FICA did not tax earnings above $90,000. Anyone earning less
than $90,000 in 2005 paid 6.2%.
As part of the Big Fix in 1983, the earnings cap that had been
present since the inception of the old age pension program was set to
cover 90% of all earnings and has risen concurrently with average
raises. Recently, the cap has covered only 85% of wages and is
projected to drop to 83.2% of all earnings. Maintaining the 90% level

would have added $330 billion to the trust fund (Bivens, 2005).
A CNN/USA Today/Gallop poll showed that more than two/thirds
of the over 1000 adults polled agreed that the income cap for Social
Security should be removed (Gleckman, 2005). This certainly fits in
with the idea of fairness since the rich tend to live longer (Gisquet,
2005), they collect Social Security benefits longer as well and those
benefits are at the high end of the scale.
The 1983 amendment also included taxing OASDI benefits for the
first time. This applied only to retirees who were collecting income from
other sources as well. The Brookings Institution conducted surveys, which
found that the definition of "affluence" affected the level of public support for
taxing benefits. Forty per cent of those surveyed favored raising the taxes
that higher-income retirees pay on their Social Security benefits; when the
income was specified at $75000 and higher, two-thirds supported the idea
(Blendon, Benson, Brodie & Wainess, 1998).
Reduce Benefits. Reports from the Social Security Board of Trustees
show that once the trust funds have been depleted by the year 2042, there
will be only enough revenues to pay 70% 80% of benefits promised (Social
Security, 2005). Personal accounts would also reduce benefits. Each dollar
taken from Social Security represents one dollar less in OASDI benefits plus
interest earned and corresponding cost of living adjustments. Economists
Christian Weller and Michelle Bragg (2001) write that"... diverting 2% of
payroll taxes to private accounts (out of a total of 12.4%) will require a cut in
retirement, disability, and survivorship benefits of 41% for anybody who is
younger than 55 in 2002 (p. 62).
Perhaps means testing could be a way to solve the Social Security
problem: reduce benefits for those households that dont depend on OASDI.
For 10% of Social Security recipients, their check represents 20% or less of
their income (Leland, 2005). President Roosevelt was adamantly opposed
to means testing in the Social Security program. He did not want there to
be any impression that the old age pension was any kind of dole. Anyone
who paid into the program was entitled to benefits. Means testing as a way
to reduce benefits is apparently not unacceptable to many Americans,
however. The definition of affluent greatly influences public opinion on the
matter of means testing. The Brookings survey found that if no income level
is mentioned, two-thirds questioned are in favor of reducing benefits for the
affluent. However, that support falls to 50% if an income of $40,000 a year
is specified (Blendon, Benson, Brodie & Wainess, 1998).
Changing the benefit index from wages to inflation would reduce
benefits. The President has endorsed a plan that would continue to

index by wage growth for those who earn less that $25,000 annually
and index by inflation for those who earn over $113,000 per annum,
and an index that blended wage and price increases for those in the
middle. Senator Charles Grassley, (R-IO), agrees that the $25,000
income level is too low (Neikirk, 2005).
Privatization might encourage a later retirement, since one's own
contributions would be more directly linked to personal pension
accumulations and eventual benefits (Quinn & Mitchell, 1996) and make it
easier to penalize early retirement as another way to reduce benefits.
President Reagan attempted to do so by reducing benefits to early retirees
from 80% to 55% of the benefits they would have received at 65, and the
Democrats in Congress rebelled. Speaker of the House Tip ONeill accused
the White House of, willing to balance the budget on the backs of the
elderly (Scheiber & Shoven, 1999, p 188).
Early retirement has been a growing trend in the U.S. since the
1980s. The Social Security Administration (SSA) reported that in 1985,
29% of 60 year-old-men were retired, up from 16% in 1970; and 16% of
55 year-old-men were retired, compared to 8% in 1970 (Packard &
Reno, 1989). A SSA survey of those men showed that thirty-three per
cent retired simply because they wanted to be retired (Ibid). One-fourth
listed poor health as the reason for early retirement (Ibid). Poor health
or disability is still the leading reason for early retirement. There is a
trend among low-skilled workers to turn to disability to fund early
retirement. Often plagued by ailments ignored as long as work was
available, unemployment sent these workers to the Social Security
office rather than welfare (Uchitelle, 2002). While there is a limit to how
long one can collect welfare benefits, its difficult to be removed from
disability and it comes with the added bonus of free health care through
Medicare (Ibid).
In addition to penalizing or even eliminating early retirement, the
government could set retirement at age 70. Americans are living
longer and healthier lives and since the next generation is smaller, its
not unreasonable to ask workers to put in a few more years and,
despite the trend to early retirement, there are a lot of workers who do.
Many are forced to work past age 65 because they dont have enough
assets accrued to afford retirement. Many just like to work. But as
shown by the growing trend of early retirement, many just want to quit
working. Schokkaert and Van Parijs (2003) confirm "the population is
fiercely opposed to any increase in the retirement age (p. 256).
As Republicans attempt to reach out to their constituents and
advance the Presidents plan, they are encountering resistance,

especially since the Democrats have already gone out and called the
Republican plan a benefits cut. To counter this, Senator Rick
Santorum (R-PA) recently introduced a bill that would put into law a
legal right to Social Security benefits for those workers bom before
1950 (Philadelphia Inquirer, 2005). This is an interesting idea,
especially since, in 1960, the Supreme Court, in Flemming v Nestor
(363 U.S. 603; 80 S. Ct. 1367), wrote,
To engraft upon the Social Security System a concept
of "accrued property rights" would deprive it of the
flexibility and boldness in adjustment to ever-changing
conditions that it demands and which Congress
probably had in mind when it expressly reserved the
right to alter, amend or repeal any provision of the Act.
(pp. 610-611).
If the Supreme Court has already decided that the individual has no
accrued property rights to Social Security, it seems that would be a block to
the Republican plan of personal accounts since such accounts would be
giving the individual worker property rights to Social Security.
U.S. Representative Tom Tancredo (R-CO) has supported the
Social Security and Medicare Lockbox Act of 2001, which passed the
House by a vote of 400-2 on February 13, 2001. The Social Security
(2005) web site describes this act
The effect of this bill is that the Social Security trust
funds surpluses and Hospital Insurance Trust Fund
surpluses would be used to reduce publicly held debt
until Social Security or Medicare reform legislation is
enacted. This prevents the Social Security trust funds
surplus from being used for non-Social Security
purposes and the Hospital Insurance Trust Fund
surplus from being used for any other purpose than
health security.
This sounds remarkably like the plan Al Gore set out in
his failed campaign of 2000 in which he proposed to use the
surplus to pay down the national debt and place the interest
saved into the trust fund.

When determining the economic future of Social Security, the Board
of Trustees calculations were based on assumptions of economic growth
over the next 75 years. The trustees pegged growth in this case at 1.9%
(Social Security, 2005). The actual GNP growth rate for the past century is
closer to 3 percent annually (Slater, 1987). Friedland and Summer (1999)
If the economy grows on average 2.8 percent per year
between now and 2030, then projected government
expenditures will be the same proportion of the
economy in 2030 as today, even assuming substantial
entitlement spending growth (p. 17).
It is this argument that makes the Democrats want to
wait before making any dramatic changes to the program.
What Do We Want From Social Security?
Social Security was meant as a safety net to protect retired
workers in their old age. Many lost all their savings in the crash of
1929 and had no way to replace their losses because they were out of
the work force. There is still that danger today. The employees of
Enron who had most of their pensions in company stock were left to
retire with little more than their OASDI benefits (Oppel, 2001).
Social Security is supposed to cover basic needs. In 2005 the
average monthly OASDI benefit was $963, raised to $1,002 in 2006
(Crutsinger, 2005). Its hard to see how that amount covers basic needs if
housing, food and health care are part of a retirees basic needs. Henry J.
Aaron, senior fellow at the Brookings Institution, describes OASDI benefits
as parsimonious and claims benefits, compared to European countries, are
small compared to earnings and start at a later age. With so many retired
workers depending on Social Security for all or part of their retirement
income, reducing benefits will require more seniors to apply for
Supplemental Security Income (SSI), a program created to help those
whose OAASDI benefit is insufficient. SSI is financed through general

On The Issue Of Fairness
The Republican plan for personal accounts removes the burden
of support of the retired generation from the shoulders of the working.
Each worker is solely responsible for his or her own self. There is no
guarantee of benefits, no safety net, only freedom from responsibility
for anyone else. Whether or not this proposal is fair between
generations, it certainly is not fair within generations. The Republican
plan allows workers to put part of their FICA tax into a personal
account. But not every one pays the same tax. The low-income
worker may pay the same rate, but 6.2% of $20,000 is considerably
less than 6.2% of $90,000. The higher paid worker has an advantage
in terms of how much can be invested and how soon. The higher paid
worker can even put less in a personal account and maintain a higher
FICA contribution thereby increasing the amount received in OASOI
benefits upon retirement.
Since the federal government would still hold the funds, there is
the possibility that it would continue to use those funds for other
expenses just as the Chinese government does with the Chinese
workers personal accounts. Personal accounts would be a boon to
Wall Street, giving them the same kind of power over Americans
retirement plans as the AFPs have in Chile. And, just as in Chile, the
government would still have to come to the rescue of those workers
who did not invest wisely. In the United States, Social Security has
saved millions of retirees from poverty; in the Great Britain, since the
introduction of personal accounts, retirement has become synonymous
with poverty. Personal accounts have led to the decline of employer-
sponsored pensions leaving the retired worker with one less source of
support for retirement. Like Chile, investment firms in the Great Britain
are collecting relatively large fees and the workers are finding their
contributions eaten up by those fees.
Cooley and Soares (1999) believe that as a major tax and
transfer program over long horizons, Social Security should be put to a
vote by the people on a regular basis, maybe every fifteen years (p. 8).
They think the voters would approve continuing the program, if for no
other reason than because those currently paying taxes believe it is in
their best interest to keep the program going.
A slight increase in the FICA tax would alleviate the shortfall.
Raising or removing the earnings cap would also help with the shortfall
and put the burden on the higher earners who enjoy from larger OASDI

payments and collect benefits longer. Making contributions to 401 (k)
plans and IRAs tax free rather than tax deferred would encourage
Americans to independently save for their own retirement. That would
not only decrease their dependence on Social Security making it easier
to reduce or slow down the growth of benefits, but it would also
improve the national savings rate.
It would not be unreasonable to put a freeze on the highest
benefit for a few years thereby allowing those with lower benefits to
catch up. Or, a flat benefit somewhere near the median of about $1200
for all seniors would have the dual effect of bringing more elderly out of
poverty and also protect the system from the strain of wealthy, healthy
seniors drawing the largest benefits for many years.
Americans seem to have a good idea of fair. They value Social
Security and want to keep the program. They understand that many
people depend on their benefits just to survive. These notions could
serve as the values underpinning a national conversation about how
social security should be reformed. Such a conversation would require
strong and wise political leadership to cut through all of the current
confusion. Perhaps in the midst of the Great Depression, it was easier
to see what had to be done to protect the elderly. Reform is not just a
matter of protecting ageing workers; its about how Americans identify
and value each American.

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