As anticipated, President George Bush has made Social Security reform the domestic centerpiece of his second term. In his State of the Union address on February 2, 2005, he declared his intent to permit workers to divert a portion of their Social Security taxes into personal investment accounts. Claiming that the current system is "headed toward bankruptcy," the president urged Congress to promptly tackle an issue that was once considered untouchable in American politics. Although in his address he did not specifically refer to the situation as a "crisis," as he did frequently during the 2004 campaign, the implication could not be clearer.
Just as the president's proposal was anticipated, so was the immediate response by opposing groups, most notably officials of the Democratic Party. Senate Minority Leader Harry Reid of Nevada left no doubts when he referred to the president's plan as "Social Security roulette," adding that offering choices to the worker "doesn't mean taking Social Security's guarantee and gambling with it." In his comments, Senator Reid did not actually describe the condition of the now 70-year-old program, but only two days earlier he emphatically stated "Social Security is not a crisis."
With the opposing positions clearly established, I'd like to analyze whether or not the Social Security program is in crisis. However, to do this we must recognize that what may be a crisis to one person is not necessarily so to another. Let's consider it from Senator Reid's perspective. Now in his fourth 6-year term in the senate, he is far removed from the tiny town of Searchlight, Nevada, where he grew up the son of a hard rock miner and a mother who took in washing. Although he still refers to Searchlight as his home, this ignores the fact that his actual residence is his three-quarter-million-dollar condominium at the Ritz Carlton in the Washington area. With the perks of his position and a comfortable retirement assured, the senator is quite correct: Social Security is not a crisis.
Viewing things somewhat closer to home, as I draw my social security checks I'm certainly not experiencing distress with the program. A little calculation reveals that to date I've paid $19,240 in FICA taxes into the system, while having taken out $104,632. If I manage to live out my actuarial years, I can expect to tap the till in grand style. Of course this should have been foreseen by the persons who established and then nurtured the system as it grew to be the Frankenstein monster it is today. It's quite natural that those of us who get in early on a pyramid scheme do pretty well. It's the late entrants that normally get the short end of the stick. You might think that we oldsters would experience some sense of guilt for profiting in such a manner. Some of us may, but you'd never know it from the actions of our official representative, the American Association of Retired Persons, which fervently supports the status quo. In any event, from my perspective, as well as from that of many other retirees, Senator Reid is correct: Social Security is not a crisis.
We're now down to a fundamental question. If, as it's pretty well acknowledged, the system will not actually go broke until 2042 or thereabouts, is it reasonable to label it a crisis? A problem for the future, perhaps, but does that constitute a crisis? This is where perspective again comes in. A young friend of mine, age 25, is a self-employed property manager who, by dint of hard work and long hours, manages to support his wife and family on his annual income of about $60,000. After payment of state and federal income taxes, housing, auto expenses, medical, various insurance premiums, and all the other normal costs of living, his remaining cash would be about $10,000. I say would be, but for one additional expense: the FICA taxes he must pay. At 15.3% of his $60,000 income, the Social Security Trust Fund takes just about everything that's left over. What he might set aside for retirement is being systematically stripped from him, going instead into a communal pot over which he has no control. As the political winds shift, and the system's insolvency becomes more unmanageable, there'll be uncertain relief for him and millions of Americans like him. I contend that my friend's crisis is not decades hence. In reality it is right now, for the earnings being taken from him during these irreplaceable years can never be restored. As with a gangrenous leg, the crisis is current even though the amputation will not occur until a later time.
This gets us to the basic dilemma: What should be done? Whether or not the several parameters laid out in the president's address are to your liking, the concept of partial privatization is at least a first step toward establishing some sort of fairness and equity. It's hard to deny that the program as it now operates is little more than an exercise in robbing youthful Peter to pay elderly Paul. Until this disparity between the generations is ended, there will be no peace in America.
© 2004-5 Al Jacobs. All rights reserved.
About Al Jacobs »
Al Jacobs has been a professional investor for nearly four decades. His business experience ranges from real estate, mortgage, and securities investment to appraisal, civil engineering, and the operation of a private trust company. In addition to managing his investments on a day-to-day basis, he is a featured financial columnist for both online and print publications. He is the author of Nobody's Fool: A Skeptic's Guide to Prosperity. You may subscribe to his financial Newsletter, "On the Money Trail," at no cost or obligation, by visiting www.onthemoneytrail.com.
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