In 1983, Social Security was insolvent.  Every penny ever collected for Social Security had been distributed to beneficiaries.  The revenue collected from payroll taxes was insufficient to cover the annual benefits of current recipients.  Social Security was forced to borrow money so it could pay the promised benefits – and the politicians went to work.

Most of the reform was based on the work of The Greenspan Commission which was formed in 1981.  It was chaired by Alan Greenspan, the man who would overtime bring us the housing crash.  The recommendations consisted of raising taxes and cutting benefits.   The politicians applauded the hard-fought compromise, and told the country that the system was fixed.

Like other fixes, the fix was short-lived.  The system now has 17.9 trillion dollars of unfunded liabilities.  That means that the system has roughly $10 of promises for every dollar of asset.  One can see clearly that the system isn’t fixed at this time.  One can argue that it wasn’t fixed in 1983. 

Understanding this failure is essential for anyone who hopes to save the system.  The failure is actually very simple to understand.  The country pushed the legacy costs of Social Security disproportionally on to non-voters with the assumption that they would cover the increasing costs.  Non-voters received substantially larger benefit cuts and substantially larger cost increases.  Now these people can vote, and there is no way to bind them to the terms of the 1983 agreement.

Over time, these people who had no vote in 1983 have grown into a massive voting block.  In fact, 2010 was the first year in which a majority of voting aged-Americans could expect to have benefits reduced as the Trust Fund runs dry.   This voting block results from two factors.  People who were non-voters have gotten older.  In 1983 someone who was 17 is now 46.  The other factor is that the promises of DC are proving optimistic.  Over the last 5 years, Run-Dry Date has dropped by 8 years.  As that run-dry date gets closer, it will affect more and more Americans, and they will vote accordingly.

Summary Of The Greenspan Commission

The people who were non-voters at the time of the 1983 changes could expect to pay the higher rates of taxes than any generation and were subjected to larger cuts in benefits. 

Increased tax rates :

“Advances scheduled increases in Social Security tax rates. Social Security tax rates (which include the Hospital Insurance tax rates) for employers and employees will increase to 7.0 percent in 1984, 7.05 percent in 1985, 7.15 percent in 1986-87, 7.51 percent in 1988-89 and 7.65 percent in 1990 and thereafter.”

Today Social Security’s portion of payroll taxes is 10.6% of the 15.3%.  If you started work in 1990, you expected to face 49 years of peak rates.  If you were 40 in 1983, you could expect to face 26 years of peak rates.  If you were 45 in 1983, you could expect to face 20 years of peak rates.

Adjustments to retirement age:

“Raises the age of eligibility for unreduced retirement benefits in two stages to 67 by the year 2027. Workers born in 1938 will be the first group affected by the gradual increase. Benefits will still be available at age 62, but with greater reduction.”

In 1984, the retirement age of someone who was 45 was unaffected.  Someone born in 1938, faced a modest increase in retirement age.  Someone born in 1960 and later got the full increase of two more years of work.  So the majority of the savings comes at the expense of non-voters in 1983.   

Introduction of means-testing :

“Beginning in 1984, includes up to one-half of Social Security benefits as taxable income for taxpayers whose adjusted gross income, combined with half their benefits and any tax-exempt interest they may have exceeds $25,000 for a single taxpayer and $32,000 for married taxpayers filing jointly. Benefits received by married taxpayers filing separately are taxable without regard to other income. Appropriates amounts equal to estimated tax liability to the Social Security trust funds.”

“Changes the earnings test for beneficiaries age 65 and over so that $1 in benefits will be withheld for each $3 of earnings above the annual exempt amount, beginning in 1990”

In 1984, this rule did not affect many people.  The problem is that these limits have not been changed for inflation.  These rules also have a greater impact on people who saved for retirement with IRAs or 401Ks.  Today it affects up to 1/3^rd of retired Americans.

The Lesson Of 1983

The lesson is simple.  You can't solve the legacy burden of Social Security by voting to put the costs on non-voters.  Overtime, these people will grow into voters that will not honor the terms of the agreement.  By sheltering one voting block at another’s expense, we opened Pandora’s Box.  Every generation will feel entitled to shift the costs that were given to them to the next generation.  When a generation says 'no', it will create a very difficult transition.

This article is reprinted with the permission of Bruce Kasting.
Then full article and other work may be found at : http://brucekrasting.blogspot.com/

The January 2012 numbers for Social Security (SS) show a mixed picture. The results mirror what is going on in the economy. There is clear evidence that revenues at SS are recovering; there is equally clear evidence that America’s social expenditures are rising at a rate that exceeds the rate of recovery.

The following numbers are adjusted for any consequences of the 2% payroll tax deduction for 2011 and 2012. As a reminder, the Treasury pays into to SS every month an amount equal to the 2% shortfall. The country ends up more indebted, but there is no net consequence to SS.

Clearly, the problem is that benefit payments are increasing more rapidly than revenues. There are two contributing forces pushing up costs, (1) 10,000 additional people sign up for benefits every day of the week and (2) inflation (COLA) is rising. The January 2012 YoY increase in benefit payments was $4.1B. Of that amount, approximately $2.1B is attributable to inflation; the balance of $2B is due to more folks getting checks.

We crossed a big corner at SS in 2010 when the first annual cash flow deficit was reported. SS will never again see a cash surplus. The only question is how rapidly the deficits will rise. It’s a bit early in the year for me to provide a credible 2012 forecast for SS. My read of the January numbers confirms my suspicions. The improvement in the economy will be trumped by increasing benefit costs. Net-net, a modest deterioration in the cash position is my base case. I think SS will produce a $56B cash shortfall in 2012 (2010 = -49B, 2011 – 47B).

The expense side of the SS equation can’t be altered. The only variables that make a difference are interest rates and the economy (jobs).

The interest rate side of the equation is easy to contemplate. SS’s income from interest is going to decline in 2012 and beyond. Ben Bernanke’s ZIRP, QE and Twist have seen to that. Ben has made it clear that interest rates will remain at historical lows for well into the future. SS is America’s biggest saver ($2.6 Trillion), it will therefore pay a price as the low interest rate environment is endlessly extended.

In June of this year, SS will re-invest its maturing bonds (and any cash it has) in a new strip of securities that have maturities from 1 to 15 years. The interest rate for these Special Issue Treasury Securities is set by a (stupid) 60-year old formula. This year, the formula will produce a yield for the new investments that is the lowest in history. In the next few years, all of the high coupon bonds will be rolling off. The old bonds will be replaced with much lower yielding assets.

This simply does not add up. SS will have to significantly revise downward its projections for interest incomes (there is no way the Fed is going to back off ZIRP anytime soon).

The economy is much harder to ponder. As of today, there is a case than can be made for continued job growth. But for how long? America has a bad habit of slipping into a recession every four years or so. The last one was in 2008, so we’re due. I think that the US will muddle through the first part of 2012 with continued modest job growth. However, a slowdown looks to be in the cards by the end of the year. As of today, there are a dozen economic headwinds that will kick in as of 1/1/13 - all of the Bush tax cuts, the SS payroll reduction and a substantial cutback in government spending (the sequestered amounts).

If we experience a recession in 2013, and the Fed maintains its low interest rate policies, it will be a very bad year for SS. The cash deficit would explode under these conditions. It could easily exceed $100b. The wheels will come off of SS’s cart. As we are seeing now, it is extremely difficult for SS to bounce back in good times. it will be impossible if we hit another economic slow patch.

This is precisely the scenario I’m anticipating for 2013. It will be a decisive year. If we end up going down an economic road as I have described, then SS will fall into full deficit (operating cash deficit + interest income). That would happen circa 2015. The Social Security Trust Fund is forecasting this event but it believes it will happen in 2021. When people realize that the Trust Fund has topped out, and the implications are understood, significant changes at SS will follow.

I point readers to a raging debate going on in Japan. To cover the growing deficits at Japan’s equivalent of SS, consumption taxes are being increased from 5% to 10% on everything purchased in the country. This massive tax increase is far too low to cover the problem. To bring balance to the system, VAT taxes have to rise to 17%.

Japan is in a different situation than the US. Its population is even older (and aging more rapidly) than ours. As in many other examples, the US is about ten-years behind Japan. But we are catching up quickly. In just a few years, America will have a similar raging debate on SS. We too will be faced with a dilemma. Either taxes have to raised, or benefits have to come down. The alternative is that the US follows Japan into the land of 200% debt-to-GDP. Unlike Japan, The US can’t survive at that rate. We will blow up before we get to 200%.

We won't see any reforms in America’s entitlement programs in 2012. The election will see to that. The immediate priorities of 2013 will not include SS. The other problems facing the economy will be more pressing. But by 2014, the jig will be up. By then, there will have been so much damage to SS that a very significant set of changes will be required to minimize what will then be seen as a systemic risk.

As if Detroiters aren’t already struggling enough to meet ends meet, now President Obama, the Democrats and a substantial number of RINO’s (Republicans In Name Only) are either outright calling for tax increases or are willing to increase taxes in order to reach a compromise that would raise the debt ceiling.

Furthermore, these same hack politicians have long claimed that Social Security is safe, and that a so-called modest adjustment in the tax code will keep it running past 2036, when the (phony) trust fund runs out.

In fact, that’s more or less what a Professor of mine at Oakland University said to me last February when I told him that Social Security wouldn’t be there for me when I retire (barring a wholesale restructuring of the program, of course).

The truth, however, does not match with the See No Evil rhetoric coming from Progressive politicians.

Consider these facts:

• Social Security, along with Medicare and Medicaid, is on track to consume all federal revenue between 2049 and 2052.
• Regardless of any tax increases, spending on these slave-inducing, destructive entitlement programs will more than double by 2050.
• Perhaps most damning, the tax rate of lowest income bracket would have to jump from 10 percent to 25 percent just to pay for these entitlement programs.

Basically, unless we want to soak the working class and lower middle class – IE, blue collar workers in Detroit and across Southeastern Michigan – with crushing tax hikes that will destroy jobs and eviscerate personal income, the only way to fix these entitlements much less solve the debt crisis is through extensive reform of government programs and government spending.

In regards to Social Security alone, “workers and their employers each pay 6.2 percent for Social Security retirement and disability benefits, adding up to a 12.4 percent payroll tax that is levied on every single worker’s income. If the government were to increase this tax to pay for Social Security’s deficits, every American worker and his boss would split an increase of at least 2.2 percent. Raising these taxes will discourage employers from hiring new workers and exacerbate unemployment.”

There’s a reason why the writer of our Declaration of Independence supported a balanced budget amendment that would cap spending at a specified, relatively low level of GDP: Because it’s perhaps the best way to keep the government from becoming a spendthrift cocaine addict that racks up trillions in debt and deficits on failed programs like Social Security while simultaneously – and falsely – claiming that the problem is not enough “revenue.”

So the next time you hear left wing politicians like John Conyers and Hansen Clark of Detroit claim that tax increases will fix Social Security and must be included as part of a debt ceiling compromise, just remember that tax revenue cannot possibly keep up with spending no matter how high the tax rates are.

Author Dan Poole

(This Article With Sources Can Be Found At )

If you are interested in Social Security, you should be paying close attention to the payroll tax holiday extension debate. This debate is shaping a major transformation of Social Security by shifting the cost for the system from workers who benefit to the general taxpayer.  This change is an extreme increase in the reach of the system.

The tax-holiday is a reduction in the employee portion of payroll taxes from 6.2% to 4.2%. The difference is made-up by the general tax payer. This year, the general taxpayer put $105 billion into the Social Security Trust Fund. Of course future retirees are going to get benefits as though they contributed the full amount. It is a subsidy from the general taxpayer to workers who contribute to Social Security, and subsequently benefit from Social Security.

“First, the system adopted, except for the money necessary to initiate it, should be self-sustaining in the sense that funds for the payment of insurance benefits should not come from the proceeds of general taxation.”

-FDR January 17, 1935
http://www.ssa.gov/history/fdrstmts.html

The tax-holiday changes the most basic principle of the system - who pays.  Historically, Social Security was funded by workers who over time might become beneficiaries.  The reason for this framework was that not all Americans participated in Social Security.  While participation has greatly increased since the inception of the program, millions of Americans today are not covered by Social Security.

Here is what it means.  First, Social Security will contribute directly to the deficit.  This change expands the revenue range of Social Security to draw on more than wage income. Now Social Security will be able to draw on capital gains, dividends, house-rents, and the like.  Second, workers who cannot benefit from Social Security will be taxed to help finance the payment of benefits.  Third, as Social Security bleeds into the general fund it will impossible to base benefits on contributions.  Benefits will be determined by political clout rather than contributions.

Look at the person who worked for Galveston County.  That worker has been strutting around all summer as politicians have promoted their wisdom in leaving Social Security in 1981.  That employer does not participate, meaning that the employees do not participate.  This law changes that.  These people will pay for Social Security without every having the opportunity to collect the benefits. 

Look at the impact on high wage earners.  Today, the Social Security Administration projects that these workers can get back as little as $0.50 pre-tax on a dollar of contribution.  This audience will absorb a disproportionate level of the tax burden coming from the general fund.  In short this change simply expands the ability of Congress to take from one and give to another on political means.

Here is what is not said: the US economy cannot sustain 15.3% payroll taxes. Payroll taxes kill jobs, and make our goods less competitive in foreign markets. Why produce goods here when you can offshore the work, and import the goods duty-free? Payroll taxes are particularly hard on labor intensive industries like manufacturing. In the end, payroll taxes effectively kill the jobs that Americans need to finance Social Security.

Even if we could sustain a 15.3% wage tax, that level of revenue does not cover the cost of Social Security benefits. At 15.3% of the wage tax, the revenue does not cover the legacy costs. Legacy costs are costs associated with taking payroll taxes in the past. We are paying costs from payroll taxes paid as far back as 1960. When the government accepts payroll taxes, it accepts a liability to pay future benefits. Today we take in revenue that doesn’t even pay for the past obligations.

There are 17.9 Trillion dollars of legacy costs according to the Social Security Administration.  Since workers can’t carry this burden, Washington wants to draw in new players and make existing players contribute more.  It isn’t simply left-pocket or right-pocket.  The issue here is left-pocket AND right-pocket.