An Approach for Solving the Coming Financial Crisis in Social Security

ABSTRACT Although Social Security contributions have increased by 961-fold since its inception in 1938 (60-fold, even after adjusting for inflation), more retirees, longer life-expectancy, increased benefits, and relatively fewer FICA workers have offset these increases. The projected $560 billion in OASI taxes in 2004 will take care of this year's retirement payments, but demographic reality will result in outflows exceeding contributions by the year 2018 and a complete depletion of the Trust Fund by 2044. Bipartisan commissions have tried to avert the financial crisis by adjusting the policies and formulas, but the fixes have been compulsory and not fully effective and have been a disincentive for people who are otherwise compelled to participate. An average worker deferring retirement for one year is better off by $16,411 (considering net wages), and the government is better off by $22,343 for that year (with deferred payments and more taxes). These numbers create large incentive opportunities. As a solution to the coming financial crisis we propose that the federal government offer upfront cash payments and other rewards for those who choose to defer retirement. Our models show that with only 7% of potential retirees accepting such incentives, the Social Security system would be preserved for an additional 8 years, and 14% would add nearly 20 years of financial viability. (ProQuest-CSA LLC: ... denotes text stops here in original.) INTRODUCTION Beginning with the stock market crash of October 29, 1929, the nation's economy spiraled downward at astonishing speed. By 1933 business activity had dropped by 60% of normal, imports and exports had dropped by about 70%, wholesale prices dropped by about one third, the Dow- Jones Industrial average lost about 83% of its value, farm values dropped about one third from already depressed levels, farm income fell by about 57%, and one fourth of the nation's workforce was unemployed (Faulkner, 1960). To this day it is still by far the greatest depression the nation (and the world) has ever experienced. It was in these dire circumstances that President Franklin D. Roosevelt addressed the nation in a variety of formats (including his famous fireside chats,) and assured the country that steps were being taken to ensure that Americans would be free from such anxieties as insecurity, fear, and want. Soon afterward, details of the Social Security program were unveiled. The enabling legislation was passed by Congress in 1934 and signed into law in 1935. Payroll deductions began in 1937, and the first Social Security checks were sent to recipients in January, 1940 (SSA History, 2000). AN EVOLUTION IN PROGRAM PROVISIONS From its modest beginnings, the Social Security program has evolved significantly over the years. The original Act, for example, provided retirement benefits only to the worker, but a 1939 amendment added benefits for the spouse and minor children. This changed the program from an individual retirement program to a family-based economic security program (SSA History, 2000). Also, Social Security began as a voluntary program. In fact, only about 50 percent of America's workers were covered under the program in 1950 when amendments were enacted to make it a more universal program (SSA History, 2000). Another evolution related to the fact that there was no provision in the original program for changes in the cost of living. The amount paid in the first month of retirement was the amount received each month for the remaining years of retirement. That was also changed in the 1950 amendment when a cost of living adjustment (COLA) was added to the plan, but increases needed to be approved by Congress. In 1972 the law was changed to make cost of living increases automatic based on the consumer price index (SSA History, 2000). To help pay for many added provisions, a 1983 amendment established the taxation of Social Security benefits to generate additional funds, and that funding source continues today (SSA History, 2000). …