Continuing the trend of overly ambitious topics to blog, this "edition" starts with a quick history of Social Security. 

 

Chancellor Otto von Bismarck introduced, and thereby made Germany, the first "social security" type of program that offered retirees an annual stipend for their living expenses in 1889.  Von Bismarck was pretty crafty insofar as the annual stipend was certainly attractive to many folks, but you had to live to age 70; at the time, most people in Germany had a life expectancy less than age 60.  Germany subsequently lowered the retirement age to 65 in 1916, after which other country's programs used that age as well, except the U.S.  Age 65 was the age subsequently adopted and retained in this country until 1983.

 

Rolling the clock forward sees the U.S. in the throes of the Great Depression.  Roosevelt had enacted the New Deal legislation to build infrastructure, get people working, and otherwise stimulate the economy.  At the same time, a potential adversary to Roosevelt's political ambitions was personified by Huey Long, a U.S. Senator from Louisiana, whose Share Our Wealth Society (SOWS) was gaining widespread support; SOWS was a program that was unapologetically created to redistribute wealth in a manner very similar to what Lenin, Trotsky, and Stalin performed in Russia.  Take wealth, belongings, and property from the well-to-do and give it to the poor so that all families could have homes, cars, and income, guaranteed.  Estimates run into the millions of the number of members Senator Long had enrolled in SOWS, with thousands of SOWS clubs across the country.  FDR's response to the threat embodied by Senator Long was enactment of the Social Security Act of 1935 as part of a second New Deal legislation.  Under FDR's Social Security Act, anyone age 65 or over would get monthly checks for the rest of their lives.

 

At the outset, Social Security was designed to be a pure retirement program versus a pension plan or welfare.  Primarily, Roosevelt had coined the term "contributory old-age insurance" to create the illusion of an insurance product in order to secure the support of America's business owners, as opposed to a welfare obligation that would most likely have caused the entitlement legislation to be stillborn.  Part of the "deal" with the business owners, then, was to impose a work requirement on employees before allowing them to become eligible; you had to first work for at least 10 years to receive any benefits, although a spouse and kids could receive your benefits if he or she did not work under 1939 legislation and then disability was added in 1956 .  Obviously the work requirement is different than a pure welfare system.  The difference with a pension plan is two fold.  First, Social Security is funded by taxes on both the employer and the employee (payroll taxes) and is paid to recipients out of those taxes.  Second, pension plans are exclusively employer funded but accumulates reserves and investment returns for future payouts.  So Social Security is a pay-as-you-go scheme while pension plans are (when performed properly) growing savings plans.

 

Many economists view Social Security as a pyramid scheme, based on more and more workers paying more and more money into the Social Security pot for a relatively small number of recipients.  Sounds great, until people start doing the younger, working generations the discourtesy of living longer than they actuarially should.  The first recipient of a lump sum payout was Ernest Ackerman, who received a total of $0.17 in January, 1937.  The first recipient of monthly benefits is Ida Mae Fuller, a Vermont worker who paid in $24.75.  Her first monthly check was $22.54, and during her lifetime, she collected $22,888.92 in payments (a quick calculation shows an overall return of about 92,500%).

 

1950 saw the first Cost of Living Allowance (COLA) increase since distributions commenced in about 1940 for all recipients to offset the costs of inflation.  1972 saw the law changed, effective in 1975, to provide an automatic COLA boost.  Obviously a great deal of additional legislation has been enacted in the intevening years since 1935, but most importantly, EVERY SITTING PRESIDENT since Roosevelt has passed significant increases in social security benefits.  And why not?  Younger generations will have more wealth, there will be more of them, and let's not forget it's a TERRIFIC way to get yourself re-elected!

 

There's more history to be provided, but ultimately, Social Security does provide a sizable benefit to America from a social perspective.  Absent Social Security, almost half of Social Security Beneficiaries would be living below the poverty rate.  That means almost half of Social Security beneficiaries are saving nothing towards their personal retirement.  Neither is the government.  The oft-argued "Social Security Trust Fund" is not a true trust fund - social security benefits are paid out in real time.  Under Jimmy Carter, Social Security almost went belly up.  Carter introduced the Save Social Security effort in 1977, spearheading a gigantic increase in payroll taxes and a cut (however slight) in benefits.  Despite the hue and outcry, these efforts weren't enough for solvency, yet AARP and simple popularity of the program precluded meaningful "reforms" to truly provide solvency.

 

Things got REALLY serious in 1983.  Ronald Reagan is president, and Social Security was within days of insolvency.  Americans were living longer.  The pay-as-you-go (PAYGO) system wasn't working due to the increasing number of beneficiaries, and the fan was in danger of being stopped by the you-know-what.  Despite the economy beginning its run into one of the greatest periods of economic growth the world has ever seen, it wasn't enough to save Social Security.  Alan Greenspan (yes, that Alan Greenspan) stepped in at the behest of Reagan with a bailout that:  1)  raised payroll taxes; 2)  increased retirement age to 67; 3)  and for the first time taxed the social security benefits of certain high income taxpayers.  Enacted in 1983, Greenspan's bailout package not only salvaged Social Security, but also started seeing accumulation of serious excess funds or surplus.  Talk of the "Trust Fund" really heated up as the surplus was thought to be going into the Social Security Trust fund...hardly!  EVERY subsequent president, regardless of which side of the aisle, has routinely tapped that surplus to cover governmental expenditures.

 

There is NO TRUST FUND!  It may exist, but there's no money in it, so what's the difference?  There is, however, a big IOU in the trust fund...

 

During the 2000 election, both Bush and Gore promised to stop helping themselves to the trust to fund government.  However, Bush has been spending the surplus just like his predecessors to the tune of almost $500mm/day according to reports.  Yet the IOUs are now accumulating interest at 6.9%.  Unfortunately, Bush was one of the first presidents to question the long-term viability of Social Security and was promptly blown out of the water with the now-ill-fated 2004 introduction of personal savings accounts.  The downside to this idea was that the diversion of resources would hurt the fiscal wellbeing of the overall program, as repeatedly stated by critics (both right and left) and the GAO.  Regardless of your thoughts on the topic, it pushed back the willingness point for any putative election contender to bring up solvency of Social Security apparently.

 

There's the history.  The problem is obviously clear (although more on that later), and the political landscape is definitely set up for a very difficult solution.  We don't currently have any presidential candidates discussing the impending funding crisis which will inevitably occur.  We don't have any House or Senate candidates discussing it.  Yet ALL continue to promise those benefits to AARP members, and no one appears to be talking about the IOU...I'd say the omission of this topic from any platform should be criminal, despite the political expediency.