Social Security: A False Crisis!

Currently Social Security takes in more than enough money to pay benefits. The Social Security Surplus is estimated to reach $3.0 trillion by the year 2018. Unfortunately, the entire trust fund surplus is borrowed every year by the government to pay for the operations of the U.S. government. The trust fund is made up of special interest bearing federal bonds (currently whose average yield is 9.5 percent) which are non-callable and have no maturity date. They are backed by the faith that future generations of U.S. citizens will continue to pay into the fund at a sufficient rate to meet the benefits due the Social Security beneficiaries. If the money going out to pay benefits ever starts to exceed the money coming into the trust fund then eventually the trust fund will have to make up the difference. If, and only if, the economy limps along at about one half the annual rate of growth (1.7 percent) of the previous 30 years will the money collected be less than the money needed to pay the benefits.

Without Social Security as it exists today, about one-half of all senior citizens would have incomes below the poverty line. Contrary to the current propaganda, the retirement of the "baby boom" generation will not bankrupt Social Security. In fact, that generation will be retired long before there is any projected shortfall from a low growth rate economy. What if the dismal 1.7 percent growth rate used by spreaders of the "crisis" propaganda come true? Would the wage and salary earners of those years suffer an undue burden supporting retirees? Not a chance! If the annual earnings were not capped at today's levels, and all wages and salaries were subject to Social Security taxes, an additional $67 billion would go into the Social Security Trust Fund. Less than 10 percent of the wage and salary earners would be affected by such a change.

The basis of the "crisis" propaganda is their belief that future wage and salary earners will not be able to meet Social Security's obligations out of a projected inflation adjusted increase of 30 percent in real wages. This belief is based on the experience of past years in our country, the majority of wage and salary earners have seen a decline in their pay. The most important solution to guaranteeing the security of the majority of future generations of retirees, is to increase the wages and salaries of the majority of America's employees by their getting a better share of the income resulting from their actual work. In addition we need to maintain a higher rate of economic growth than the dismal 1.7 percent projected by the promoters of "privatization" in their campaign to "fix" the Social Security "crisis".

"Privatization" will divert tens of billions of dollars from Social Security Funds and give it to Wall Street financial and investment services tycoons in administrative and brokerage fees. Their firms are anxious to get Social Security "privatized" before the American people rediscover that stocks can go down as well as up. There are a number of ways to raise revenue for the Social Security System which would make it more fair than "privatization". For example, we could tax income not resulting from wages or salaries such as capital gains. Income to investors derived from capital gains in recent years has increased significantly more relative to income from wages and salaries.

Social Security has faced long-term financing problems in the past for which workable options were found without destroying the safety net of our children and grandchildren that was created by preceding generations of Americans. Here are some statistics that the "privatizers" want us to forget in the process of destroying the safety net of Social Security.

  1. More than two-thirds of elderly households rely on Social Security for half or more of their income. Social Security is safety-net income for millions of Americans.
  2. Currently, 44 million people receive Social Security benefits which includes 7 million survivers of workers who have died, 6 million dependent children, and 4 million disabled persons.
  3. Only 45 percent of American families get pension income.
  4. Half of the elderly households have income from savings that totals less than $110 per month.
  5. The number of Americans filing personal bankruptcies reached more than 1.5 million. It is not a good idea to hand over safety-net Social Security money to millions of people who have disastrous records of handling personal finances.
  6. If Social Security is privatized into personal accounts, cost of living adjustments will no longer be guaranteed. Even a modest 3 percent inflation rate cuts the purchasing power of a benefit check by 26 percent in 10 years and by 45 percent in 20 years - when most people start receiving their benefits.
  7. Women - often in the work force 10 years less than men and likely to live 5 years longer - will not, under personal stock market accounts, be able to get actuarially fair annuities at retirement to last them the rest of their lives.
  8. The stock market lost 45 percent of its value between 1965 and 1978. What will happen to the personalized account values of those persons who retire during such a market plunge in the future?

Our present Social Security System has an administrative cost that is just 0.7% but by contrast the U.S. life insurance industry's operating costs average 12-14% and often exceed 40%. A "privatized" retirement system in Chile, often pointed to as an example by supporters of "privatization", runs close to 30% of revenues due to the fact that the competing mutual fund managers and portfolio managers all have their fees. The Chilean model is based on a compulsory IRA scheme in which all covered employees put 10% of their earnings into one of several approved mutual funds which invest their holdings in the stock and bond markets. Chilean employers are relieved of making any matching contributions. So much for the advertized "efficiencies" of privatized systems over Social Security's more than 60 year history of paying its pensioners without the volatility and scandal associated with the financial markets in the U.S. It is conservatively projected that as many as half of all future Chilean retirees will draw a poverty level pension and the poorest of them will receive a public pension check equal to less than $2 a day.

Waste, mismanagement, and fraud among stock brokers and brokerage firms concern securities regulators. Privatization will put tens of millions more unsophisticated investors in the position of dealing with fraud and chicanery without the resources to sue brokerages on an individual basis.

What will be the effects of dumping Social Security Trust Fund Reserves out of US Government Securities and into individual Stock Accounts?

  1. It will depress the value of US Government Securities and push interest rates for these securities up.
  2. Increases in interest rates of US Government Securities will force mortgage rates up.
  3. Increases in interest rates of US Government Securities will force interest rates on bonds for schools, roads, and other local infrastructure needs up.
  4. Increases in interest rates of US Government Securities will drive taxes up for our wage and salary earning citizens or result in the deterioration of needed public services on the local level.
  5. It will risk the financial security of retiring working people on the ups and downs of the stock market.

A great deal of money is being spent by the financial services industry in trying to generate and market the idea of a Social Security "crisis". Wall Street aims to convince the public to accept the idea of gambling with the Social Security Trust Fund in the stock market. This will transfer a major portion of the funds earmarked as a safety net for American wage and salary earners into the pockets of already rich owners of investment and brokerage firms. The owners of the financial, imvestment, and brokerage firms can not and will not guarantee that it wiil make up any losses to the Trust Fund suffered by their handling of the Social Security funds. It was the American tax payers who bailed out the speculating done by the financial and investment company managers during the Savings and Loan and Junk Bond fiascos. The tax paying public are still making up the losses suffered by savers and small investors. The owners of the speculating firms did not have to make up the losses from the profits and assets accumulated in the course of their management of funds entrusted to them.

Financial services and investment firms have teamed together and funded a $2 million "privatization project" at the Cato Institute, a think tank in Washington, D.C. (which is advised by a former Chilean cabinet minister who guided the "privatization" in Chile). The team composed of the mutual fund industry, Merrill Lynch, the National Association of Manufacturers, and other investment-finance industry corporations are engaged in trying to steam roller "privatization of Social Security" through Congress. Their motivation is the opportunity to divert a portion of the $1.2 trillion to $4.2 trillion (based on estimated year 2015 dollars) of money paid into the Social Security Trust Fund by workers and their employers to substantially increase the profits of these firms.


The myth of a "crisis" in Social Security must not stampede us into accepting the idea of individually controlled investment accounts. We must resist any attempt by Congress to invalidate a retirement insurance program that permits millions of our elderly citizens to remain self- supporting and independent. Whatever reforms are put in place should follow the historic principles that are in force under current law such as:

  1. Social Security contributions are totally dedicated to paying Social Security benefits. All budget "surpluses" are be used to build up the Social Security Reserves instead of paying for tax cuts.
  2. Social Security benefits are calculated based on a person's pay and how long the individual works and contributes. The impact of any changes must not fall disproportionately on lower-income groups or on those whose work life has been physically demanding or on those with a lower life expectancy. The program should continue to replace a larger share of low-income workers' past earnings as a protection against poverty.
  3. Social Security benefits are not means-tested and are to remain universal and portable, guaranteeing monthly benefits that provide a decent income and that are adjusted to keep up with inflation as long as you live.
  4. Social Security Benefits for women - who have lower lifetime earnings and more workforce absences because of care giving for children, parents or spouses - are to be preserved and strengthened.
  5. Social Security Benefits must continue to provide risk-free disability protection for workers and their dependents. It must also continue to provide survivors' insurance for spouses and children of deceased workers and it must continue to provide benefits for those adults with severe disabilities who are dependents or survivors of their parents.
  6. Employees, employers, and those receiving benefits should share jointly in the impact of any options selected to guarantee the long-range solvency of the Social Security System.

For further information, see the book published by the University of Chicago Press:

Social Security: The Phony Crisis by Dean Baker and Mark Weisbrot

Please discuss the options for modifying the system with your family and friends and see if agreement can be reached on which ones are preferred. Send your comments and ideas to your Congressmen as the debate over what to do is in progress now. Write letters to your newspapers stating your position. Also send copies of your comments and ideas to:

AARP, L&PP-Social Security
601 E St NW
Washington, DC 20049

Note: For more information see the article entitled "Save Social Security" by Linda Stern appearing in the January-February issue of Modern Maturity published by AARP as well as a posting on the Economic Policy Institute Web Site Brief #112 at:

Please send any questions or comments from here now or at your convenience later to: