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  Social Security Under Siege: A Water Tank Analogy

ECONOMIC ANALYSIS:

Social Security Under Siege: A Water Tank Analogy

by Fred Cederholm

EDITOR'S NOTE: This article is the author's first installment on "Social Security Under Siege."

The core problem is that Congress can’t imagine living without the evergreen Social Security surpluses, much less conceive how they’ll ever pay back what’s already been misappropriated and spent.
There has been a lot of discussion in the press regarding "privatizing/fixing" the Social Security Program, but the public still lacks the information necessary for understanding the issues and assessing the magnitude of the alleged problems. Because of this ignorance, the public is vulnerable to a propaganda blitzkrieg. Well, I've been thinking about Social Security--and Maui, water storage tanks, water/cash flows, Congress, and the Bush reform proposals. Let me explain.

On February 23, I was a guest on Bonnie McFadden’s radio program, "Think Globally, Act Locally;" broadcast from Maui, Hawaii on KAOI-AM. The subject was Social Security. Her listeners got an earful during that hour regarding the real issues—private investment accounts just will not get at the core of the problem—at least, not the way I see it.

The essence of the dilemma facing US/us here involves the timing/ matching of the cash flows—the ins and outs of the bucks needed to meet the future obligations. To make my point, I used the analogy of a big water tank with spigots at the top filling it, and spigots at the bottom draining it. Think of the Social Security System as that water tank.

When signed into law on August 14, 1935 there were about 42 workers for every retiree. Employers and employees picked up the tab for the benefits by each paying a tax on a maximum base wage amount—then $3,000 in earnings. There were thus two input spigots at the top to keep the tank filling and one output spigot at the bottom—for retirees.

In 1939, the Act was amended to provide benefits to the survivors of those workers covered by the program. These included widows/ widowers, minor aged children, and dependent parents. This added a second output spigot at the bottom—for survivors. But... there were still only the two input spigots at the top.

In 1956, the Act was amended to provide benefits to disabled workers age 50 to 65 and to disabled adult children. Over the next two years, disabled workers under 50 and their dependents qualified for benefits under the system. (Disabled workers of any age now qualify.) Our "tank" now had two ins and three outs—retirees, survivors, and the disabled.

In 1961, men could elect to draw somewhat reduced benefits at age 62—an option open to women since 1956. The mid-1960’s saw the addition of Medicare, which extended health coverage to retirees 65 and older (and eventually to disability beneficiaries as well). The "tank" basically had the same two ins, but there were now four outs.

In 1975, the 1972 law implementing Cost Of Living Adjustments (COLAs) became effective. From that point on, we would see the first three "out spigots" opened a little bit more every year. To keep the system as a "pay-as-you-go" operation accommodating these changes over the years, the tax rates paid by both employers and employees had ratcheted up steadily, and those rising rates were applied to an ever-increasing maximum wage base—$25,900 in 1980.

It became apparent by the mid-1980’s that shifting demographics (fewer workers per beneficiary) foretold a future funding disaster. The Greenspan Commission came up with a "fix" to make the system actuarially sound for 75 years. The rates paid by employers and employees increased still more and the maximum wage base ratcheted up skyward—to $51,300 in 1990, to $76,200 in 2000, and to $87,000 presently. This "fixed" it, as Social Security inflow generated huge surpluses. It was even feared the "storage tank" would overflow—so not to worry!

Congress laid a pipeline to their pork farm—tapping the Social Security reservoir to mitigate the ballooning deficits and "water" their pet projects. Social Security should have an accumulated surplus exceeding $2.6 trillion now; not a "lock box" of IOU’s from the US Treasury. The core problem at issue here is that Congress can’t imagine living without the evergreen Social Security surpluses, much less conceive how they’ll ever pay back what’s already been misappropriated and spent.

Putting this in a way that "W" can understand—since he comes from the grazing heart of Texas. There is an old cattle country expression: "When you can’t get the expected milk from your heifer, you had better look for the stray calf that’s been sucking on the hind ‘spigot’." To find the stray calf, he need look no further than Capitol Hill—and private investment accounts just won’t fix it.

I’m Fred Cederholm, and I’ve been thinking. You should be thinking, too.


Copyright 2005 Fred Cederholm. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer who contributes the column "TH*NK*NG" to The Weekly Observer in Creston, (Ogle County) Illinois. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.

To "Audit" this column, and to learn more about US Social Security history and the coming problems check out the following web links:

This is the Social Security Homepage. Their entire web site has been reworked over the past year to reflect the growing concern over the future of benefits. It is excellent!

Clicking on History, Research & Data to the right brings you to an index of five key areas; clicking on History will get you to the history home page and the FAQ’s which give you a great basis to start your investigation into the Social Security System—the whos, the whats, and the hows. They will refer you to further specific pages/schedules within the site. You could spent hours trying to zero in on these schedules by going through the report index and the topic index.

This page takes you to three historical summaries—which are all excellent.

And this page is your portal to some key monthly "facts and figures reports."

The "mother lode" of data is the Annual Statistical Supplement—the 2003 report is available online now and the 2004 report will be up shortly. Scroll down to the table of contents, your gateway to a multitude of reports available in both HTML and PDF format.



Copyright © 2005 The Baltimore Chronicle. All rights reserved.

Republication or redistribution of Baltimore Chronicle content is expressly prohibited without their prior written consent.

This story was published on March 2, 2005.

 
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