Background & Facts

see also the skinny, pro & con, links

what's social security - who pays - who gets

Social Security is like a giant retirement system for the country's workers and their families. Under Social Security, the federal government doles out about $470 billion a year (22% of all federal spending) to retirees and their families (70% of the payees), disabled workers and their families (16%) and survivors of deceased workers (14%) (SSA and CBO). Over 90% of seniors (65+) collect Social Security (SSA).

In theory, you and your employer pay for your future Social Security checks by giving 12.4% of your earnings; 6.2% from you, informally known as the payroll tax, and 6.2% matched by your employer (self-employed have to pay the full 12.4%) (CNN). Higher earners only have to pay payroll tax on the first $90,000 - a ceiling that gets raised every year. What you get out when you retire depends upon how much you put in, but not in direct proportion. Lower earners get a proportionately bigger return; for example a 55 year old today who makes $40,000 a year can retire at 66 with a check at about 37% of his income - someone making $70,000 would get a check at 30% of
his income. (See SSA's calculator to figure out how much your check will be).

Practically - when you follow the cash flows - what happens is that the payroll tax from today's workers goes to pay for the Social Security checks for today's retirees. Because workers are currently paying up more than what is being divvied up, the government can put extra cash into a "trust fund" to help pay for the day our retirees require more money than our workers are giving over. (The idea of a trust fund was created in the 80's with the future retirement of baby boomers in mind. Unfortunately the trust fund won't hold up as originally hoped for.)

Social security's future forecast(s)

If the current system and formulas stay the same, Social Security will run into problems as the number of retirees outgrow the number of workers (a phenomenon happening because we're living longer). In starkest terms, today there are about 3 workers for every one who gets a social security check; in thirty years there will be about 2 workers per beneficiary (SSA). At some point, around 2017 (SSA) or 2019 (CBO), retirees will be getting more in Social Security payments than workers will be paying out. When that happens we will start dipping into the Social Security trust fund. That, in turn, will tide us over until about 2041 (SSA) or 2052 (CBO). After that point, there will be a shortfall between how much retirees
were promised and how much the government is set to pay. The total shortfall over the next 75 years is estimated to be about $2 trillion - $3.5 trillion (NYT). Infinitely into the future it adds up to $10.4 trillion (WP).

Bush's proposed fix

Although Bush never gave a fully detailed plan for reforming Social Security, the president outlined the framework of a possible plan in February 2005. Congress piped up with alternate plans afterwards, but no final plan ever took shape. In the absence of a frontrunner congressional plan, CitizenJoe takes a look at the president's ideas:

Private accounts.
Bush sees a way to partially avoid the future cash crash by allowing today's workers to put up to 4% of their income into private retirement accounts (with an initial cap of $1000 a year that would be phased out over time). Workers would have a limited choice of funds where they could invest their accounts and those accounts would be managed by the government. By opting to have a personal account, a worker would receive a smaller Social Security check when she retires. To understand exactly how much smaller requires some mental gymnastics. The Washington Post gives a detailed explanation of the math; in essence, the government would be subtracting out how much you took out over the years plus 3% interest (which the government would have had if it held on to the money and invested it). The White House's math is simpler, but - at least to citizenJoe's mind - comes out to the same: if you put a third less toward Social Security and instead put that money in a private account, your Social Security check will be a third smaller than it otherwise would have been. For the full White House plan, go here.

Phasing private accounts in.
Social Security would go untouched for those 55 and older, but starting in 2009, workers born in 1965 and earlier would be able to divert part of their payroll tax into private accounts. Younger folk could start their accounts soon after - in 2010 for workers born before 1978 and 2011 for everyone else born after 1950.

Paying for the transition from plan A to plan B. Since today's Social Security checks come from today's payroll taxes, moving some of those payroll taxes to private accounts means there will be a temporary shortfall in current payments for Social Security (until the private accounts start paying off in the future). Bush has generally said this shortfall will be covered by borrowing money and not increasing taxes, but he has left a little wiggle room when it comes to raising the cap on the payroll tax (see below). Estimates on how much we'd need to borrow range from $700 billion over the next 10 years, to $4.5 trillion over the next 23 years (adding to our current debt of $7.5 trillion).

Filling the funding hole. Whatever good private accounts bring, they won't solve the problem of the funding shortfall expected somewhere between 2042 and 2052. There are only two ways to fill that hole - raising funds (i.e. taxes) or cutting back on benefits. Bush has stated he won't do the former, but he also hasn't ruled out raising the cap on payroll taxes. Now workers pay the Social Security tax on their first $90,000; raising that ceiling could go a long way to fill the funding gap.

On the benefit cutting side, Bush put a couple of options on the table; increasing the retirement age, cutting benefits to wealthier retirees or pegging benefits to inflation rather than wages. In April, 2005 he came out in favor of the last option, but in a moderated way so that low income workers won't be hit by a decrease in benefits. A little explanation is required: the formula that says how much you get on retirement looks at two things: how much you made during your 35 high earning years and how much wages, in general, have risen over time. By pegging payments to wages, your Social Security check is calculated so that you can retire relative to your standard of living (in other words, keep up with the Joneses). By pegging payments to inflation rather than wages, future generations would get smaller benefit checks.

Bush's proposal would allow low earners ($20,000 and less) to continue to have their benefits rise alongside wages while high earners ($90,000 and above) would see their benefits rise with inflation. Folks in between would fall on a sliding scale somewhere in between. The Washington Post breaks down how folks would fare at different income levels; basically, everyone who makes more than $20,000 a year would see their future benefits decrease - by up to 49% in 70 years for the highest earners - but those making less than about $50,000 would be better off than if nothing had been done to change Social Security system and it went "bankrupt." (WP)

The unknowns

Question marks abound in Bush's reform proposal, but answers to these questions should become clear(er) when a detailed plan emerges. Among the unknowns are:

• How will the private accounts be managed? Will workers have flexibility in where they can invest their money or will there be strict limits to just, say, government bonds? (According to the NYTimes, most discussed plans propose starting off on more limited investment options and then increasing flexibility. Congress Daily reports a Bush plan would offer workers five investment options and create a default option that would make progressively safer investments as workers near retirement age.)

• What kind of safety nets will there be to make sure workers don't lose their private retirement accounts?

• How will the plan compensate disabled workers, who - because they stopped working before retirement age due to their disability - won't have full private retirement accounts.

• What happens to a worker's account if she dies before using it up (assuming it goes to her family, how would it get taxed)?

Other variations floating out there

Bush's proposals have out-and-out opponents but also cautionary supporters who have their own ideas on how to vary his plan.

Some supporters of private accounts would rather find another way to pay for the short term shortfall in Social Security funding they'll bring on - other than borrowing money. One proposed way to do that would be to raise the payroll tax ceiling (currently only income up to $90,000 is taxed for Social Security) - or raise taxes in another way.

There was also talk of filling the funding hole by extending the retirement age. Some would also combine Social Security reform into larger legislation that would also consider tax reform or overhauls to publicly backed pension plans.

For a chart of some competing proposals out there, see this Washington Post graphic from February. A March article describes even more Republican-proposed plans.

What the House and Senate came up with

Senate: The Finance Committee worked on a bill that focused just on Social Security - unlike the House which wanted to combine reform with broader retirement measures - but it has yet to come up with a final plan. According to Congress Daily, the committee played around with ideas to fill the shortfall in Social Security by trimming benefits only for the wealthiest workers (probably by tagging their benefit increases to inflation rather than wage increases) or by raising the retirement age. The plan would likely include private accounts, either using payroll taxes or using an additional sliver of workers' wages.

Other senators ideas: Senator Bennett planned to offer a bill that would create private accounts starting off using money from workers' salaries (that is, on top of what is already taken out in payroll taxes) and only later take money out of the payroll taxes now going toward Social Security. Senator DeMint introduced a bill that would use the Social Security surplus to create private accounts.

(Note on DeMint's plan and using the surplus only: if you're confused on how using the surplus is different from
using workers' payroll taxes to set up private accounts, so is CitizenJoe. We think there may be a symbolic difference only - but then again we are willing to admit there is an accounting nuance we're missing here.)

House: The Ways and Means Committee was discussing a combined Social Security, pension reform and private retirement accounts bill. The bill would have address concerns about private pension funds that critics say are not financially stable. Early signs in the House also suggest that it would have supported private accounts funded by the Social Security surplus.

Updated April, 2007.

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