June 10, 2010

Dear John,

Thank you for contacting me with your thoughts regarding Wall Street reform and accountability. I appreciate hearing your views on this important topic. 

The economic crisis that began two years ago exposed shortcomings in the oversight of financial firms and financial products and highlighted the need for change. Reforms to modernize our financial regulatory system, including increased accountability for banks once deemed "too big to fail," are critical steps to ensuring long-term economic growth and stability for hardworking Americans and small businesses. 

Rocky Mountain Action Coalition

Introduction

In fiscal year 2010, Social Security Old Age Insurance took in less money in tax revenues than it paid out in benefits. However, Social Security did not operate at a deficit; the accumulated interest on over 2.5 trillion dollars worth of government treasury bonds in the Social Security Trust Fund insured that the program continued to operate in the black.[i] Social Security will continue to have sufficient funds to pay all pensioners for another 27 years; after that, with no changes, it will pay 78% of full payments to all pensioners indefinitely.[ii] Social Security reform is a long-term issue.

Many proposals have been made to insure the long term sustainability of Social Security. Most of these proposals encompass decreasing benefits in some form, including increasing the retirement age. The Rocky Mountain Action Committee (RMAC) firmly believes that the best way to sustain long-term fiscal soundness of the program is to increase revenues by removing the cap on annual payroll taxes that finance the program.

While many in Congress will resist any increase in payroll contributions due to philosophical or ideological differences, it is the only solution that makes sense for average American citizens. For too many years, the Congress has pandered to special interest groups in establishing the policies that govern Social Security. It is time for a new fresh approach to sustain the long term health of this program.

Background

Social Security[iii]

The “Great Depression” of the 1930s was especially devastating to elderly Americans. Pensions were not common or sufficiently large to meet all of the elderly persons’ needs. Younger family members, who had traditionally been a source of support for their parents and grandparents, were no longer able to meet their own needs, much less those of elderly family members. Bank failures wiped out the savings of millions of Americans. Many senior citizens made that dreaded trek up “Poorhouse Hill” where they received minimal housing, food and clothing. Others stood in line at “soup kitchens” to receive daily sustenance. Some just died of malnutrition and exposure. In response to public outcry, President Franklin D. Roosevelt signed the Social Security Act (HR 7260) on August 14^th 1935. Title II of the Act set up the Old-Age Pension system, and employers and employees began paying a 1% payroll tax on the first $3,000 of each employee’s earnings. In addition to ensuring elderly Americans some income after retirement, the Social Security Act also instituted federal unemployment insurance and aid to dependent children. The term “Social Security” has since come to refer to the Old-Age Pension system itself. It has been a tremendous success for 75 years.

Over the first 38 years after the advent of Social Security, Congress made a number of additions to benefits and expansions of the people covered. To pay for each expansion, Congress increased the taxes. By 1971, the tax rate for employers and employees had reached 5.2 %, paid on the first $7,800 of earnings.

This method of specifically matching financing to needs was changed in 1972, when legislation was passed that provided an automatic cost-of-living adjustment (COLA) annually to the benefits paid.[iv] Increases in the ceiling on taxable earnings also became automatic, pegged to average wages. Increases in the payroll tax rate were specified, reaching 7.3% in 2011. The automatic COLA, in combination with poor economic conditions, faulty projections of wage growth and benefits costs, as well as demographic changes undermined the financing system that had been set up. A series of
changes was made, culminating in the 1983 Social Security Amendments, which put the program on solid financial ground for the short term and greatly reduce the projected deficit for the long term. Payroll taxes were increased and some benefits were reduced. In the 1983 Amendments, Congress began taxing Social Security benefits for the first time. Now, some monies that are collected via payroll taxes are taxed again when paid as benefits to Social Security recipients.

At the start of the Social Security program in 1937, a Trust Fund was set up to receive the money from the payroll tax. Benefits and administrative costs are paid from the Trust Fund. Trust Fund moneys are invested in Special Issue U.S. Treasury Securities available only to the Trust Fund. Thus, money in the Trust Fund not needed for immediate benefits and expenses are available to the U.S. Treasury for other programs. When the securities are redeemed, both principal and interest must be paid to the Trust Fund. Today, over 2.5 trillion dollars worth of bonds exist in the Trust Fund[v]. As the program begins to run a perceived deficit, i.e. paying out more in benefits than it is receiving in revenue, Congress must come up with funding to redeem the value of these bonds. This will require Congress to increase revenue, decrease other national spending, borrow more from other sources, or do some combination of these actions.

Employer-Provided Pensions[vi]

Beginning with the railroads in the late 19th century, many industrial companies instituted old-age pensions for their workers. During World War II, wages and salaries were frozen to combat wartime inflation. Companies began offering enhanced benefits, including more generous pensions, to attract and retain workers. Pensions were now designed to provide employees a portion of their working age wages for the rest of their lives. In 1974, the Congress enacted the Employee Retirement and Income Security Act (ERISA). ERISA established rules on how pensions and pension funds were managed to ensure sustainability and fairness to the employees. ERISA tightened the rules on Defined Benefits (annuity) pensions in favor of the employees, requiring the trust funds to be adequately funded by the companies. At the same time, Defined Contributions plans were becoming more popular with employers; there are no funding requirements, and the employee bears the entire responsibility and risk of how the funds are invested. Tax treatment for
Defined Contributions plans became more attractive for companies and employees. As a result, many companies have moved from their traditional Defined Benefits pension plans to other plan types that allow companies to escape the burdens of maintaining pension trust funds and providing specific pension benefits.

Present Situation

So what does the future hold for most elderly American citizens today? Traditional employer-provided pension plans are becoming a thing of the past. Most Americans cannot afford to save enough through contributory savings programs to adequately fund their retirement. Social Security has no real money in its Trust Fund, has made no COLA increases for two consecutive years, has increased the retirement age for full benefits from 65 to 67 and taxes benefits of an individual with total gross income over $25,000. Social Security has always been a pay-go program, i.e. taxes collected from workers directly fund payments to retirees. Assuming the monies that Congress has borrowed from the Trust Fund are returned with interest, Social Security can continue to support itself until 2037. However, many politicians prefer to see Social Security as part of the overall problem of the federal deficit and would cut benefits to help reduce the deficit. Must we return to the desperate days of the 1930’s or can the Congress find the political will power to once again make Social Security a sustainable program?

Proposed Solutions; Pro’s and Con’s

Three Republican Senators, Lindsey Graham (S.C.), Mike Lee (Utah) and Rand Paul (Ky.), have proposed increasing the retirement age for full Social security benefits to age 70. While early retirement at reduced benefits would still be available, the early-retirement age would rise from 62 to 64[vii]. The age for full benefits is already 66 and will reach 67 soon. Many persons in Congress continue their “cushy” jobs beyond the age of 70. However, many working class Americans cannot physically perform manual labor until age 70. Coal miners, steel workers, bridge builders and oil workers have much difficulty working until they reach 65. Many opt for early retirement because they are physically unable to perform their jobs. What would happen to these millions of workers under the Republican proposal?

With the demise of traditional pensions and a stagnant economy that has eroded life savings, many elderly Americans now count Social Security as their only source of income. About 22% of married couples and 43% of single senior citizens rely on Social Security for 90% or more of their income. [viii] The average senior receives $14,100 per year in Social Security payments,[ix] leaving many seniors at or below the poverty line (about $15,000 for a family of two[x]). Medicare B premiums and federal income taxes are subtracted from Social Security payments. To further reduce their income would result in many more Americans living in poverty.

Another proposal is to index retirement payments to total income; i.e. persons with high annual incomes would receive reduced retirement benefits[xi]. This may make sense when considering that in 2007 presidential candidate John McCain and his wife reported an income of over $771,000 and still received over $23,000 in Social Security payments.[xii] However, if we expect the wealthiest Americans to pay into Social Security, they should also expect to receive benefits when eligible.

Finally, the preferred option is to increase revenue by removing the cap on payroll taxes. The President’s Deficit Commission recommended gradually increasing the taxable maximum to capture 90% of all wages by 2050. It further recommended a special minimum benefit to reduce elderly poverty, indexing the minimum benefit for inflation, switching to a more accurate measure of inflation for calculating COLA’S and providing for the retirement needs of workers in physical labor jobs. [xiii]

It should be noted that the Deficit Commission also proposes some cuts in benefits, such as increasing the retirement age except under certain circumstances and indexing benefits to income levels. Their proposal as a total package includes increases in revenue along with both increases and decreases in benefits.

Conclusions

RMAC agrees with the findings of the President’s deficit commission with one exception; we believe the cap on payroll deductions should be removed immediately. Why should physical laborers and other average Americans pay the full Social Security tax on their annual earnings while corporate CEO’s and billionaires are through paying in January each year? This would solve the problem of Social Security having to reduce benefits in year 2038.

However, there is a more basic problem with the Social Security program; Congress does not have the money to redeem the $2.5+ trillions they have borrowed from the program without additional borrowing or raising more revenue. With the current $14+ trillion deficit, additional borrowing is a poor choice. We believe Congress should choose to increase revenue. Everyone is aware that one of our largest corporations, GE, paid no taxes the past two years while realizing profits in the 10’s of billion of dollars.[xiv] Congress must find the will to close corporate tax loopholes and raise tax rates to cover the debt they owe to the Social Security program. A good start would be to repeal the President Bush tax cuts that primarily benefited corporations and the “super rich.”

Rocky Mountain Action Coalition (RMAC)

May 2011