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Retirement Insurance at 75

By Joel Dresang

At 75 years old, the Social Security Act is drawing the speculation and foreboding that often accompany advanced age.

President Barack Obama, marking the August birthday of the program, hailed Social Security as “a cornerstone in the foundation of America’s middle class.” He also contended that Republican leaders plan to “privatize” the program, a claim that the independent FactCheck.org found mostly unfounded.

But that’s not to say Social Security doesn’t have a target on its back. With fewer workers available to pay for the looming waves of retiring baby boomers, Social Security faces challenges.

In 1945, nearly 42 U.S. workers paid into the system for every one American who received benefits. Today, that ratio is less than 3-to-1. By 2035, the government expects the ratio to be about 2-to-1.

Today, Social Security pays out more than $700 billion a year in benefits to 53 million U.S. citizens. That’s one in every six residents, including 90% of those 65 and older, accounting for about 40% of the income of older Americans.

Social Security has run as a pay-as-you-go program, relying mostly on payroll taxes from workers and employers. It also receives revenue from income taxes paid on some benefits by high-income recipients as well as interest earned on surplus funds invested in special Treasury securities.

Social Security’s trust fund has about $2.5 trillion, which should grow to $4.2 trillion by 2024, according to a recent update by the system’s trustees. After that, the fund is projected to draw down until 2037, at which point payroll taxes alone would cover about 78% of the benefits owed.

If that suggests that shoring up Social Security funding isn’t an urgent matter, consider that it is one of three entitlement programs – along with Medicare and Medicaid – imposing ever-larger burdens on U.S. debt.

For more information, please visit Social Security Online and the Social Security retirement planning section.

Dread of debt – mingled with political debate over the role of government – has put Social Security in the cross hairs. The Wall Street Journal reported recently that the bipartisan National Commission on Fiscal Responsibility and Reform is weighing various options for benefit cuts and tax increases for Social Security among its proposals.

John Witte, a professor of public affairs and political science at the University of Wisconsin-Madison, said he sees no need for alarm – neither from retirees nor from workers counting on Social Security as part of their retirement income.

“People should not be worried,” Prof. Witte said. “I think it will be worked out.”

Pamela Herd, associate professor of public affairs and sociology, also at the UW, agrees with Prof. Witte.

“The fiscal problems with the program are very easy to fix,” says Prof. Herd, who has been studying Social Security for more than a decade. “Furthermore, politicians realize how popular the program is with the public.  It will get fixed.”

Relatively minor adjustments could keep the program funding full retirement benefits far beyond 2037, the professors say.

For instance, raising the cap on income subject to the Social Security tax (now limited to $106,800 a year) “would take care of most of the shortfall,” Prof. Herd said via e-mail.

Administrators also could tie annual cost-of-living adjustments to wage inflation, instead of consumer prices, Prof. Witte said.

Just as in 1934, when President Franklin Delano Roosevelt summoned Wisconsin economist Edwin Witte to design Social Security, the U.S. economy now is in a fragile stage. Part of the aim of Social Security was to foster a sense of confidence through which Americans could spend and do business – especially during hard times.

“It is only when people are not undernourished, enjoy good health, and have hope for bettering their lot, or at least for being spared the direst consequences of want, that they put forth their best efforts or are capable of doing so,” Edwin Witte said, according to an account in On Wisconsin alumni magazine.

Another possibility is raising the age to qualify for full benefits – extending a remedy enacted in the early 1980s. You can still apply for partial benefits at age 62, but the age for full benefits is rising to 67 from 65.

Prof. Witte’s familiarity with Social Security is more than academic. His grandfather, Edwin Witte, is considered the Father of Social Security.

Prof. Witte reminds retirees and workers that Social Security never was intended as a stand-alone retirement fund but as a “secure, solid” supplement to what Americans can save for themselves through employer retirement plans and investing.

“You’ve got to think of Social Security as part of a whole portfolio,” Prof. Witte said.

Part of Prof. Herd’s confidence in the continuation of Social Security is its popular support.

“The public is overwhelmingly supportive of the program. Throughout its history, its popularity ratings have been 80%-90%,” Prof. Herd said. She noted that even supporters of the Tea Party, which promotes smaller government, are in favor of Social Security, according to a New York Times/CBS News poll.

“So whether it’s the deficit commission or some other entity it will be addressed and fixed,” Prof. Herd said of Social Security’s long-term funding. “No one would want to face the wrath of the public if it weren’t.”

Joel Dresang is vice president of communications for Landaas & Company.

Initially posted August 30, 2010

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