After reading several panelists response to personal accounts and some peoples responses on debt and OASI surplus, I find few again realize the true problem and how it came about.
TERMS
OASI - Old Age Survivors Insurance Program pays those over 62 and is what most refer to Social Security. It is the original portion. Current tax rate for 1999 is 10.3% down from 10.4% in 1998. .1% was shifted to DI to help that program. Social Security predicts OASI to go belly up 2036 without DI, 2034 with DI.
DI - Disability Program which pays for many things (disabled worker, death of worker, etc up to age 62) At age 62 a spouse may file for OASI benefits on a deceased workers wage history if it is greater. Current tax rate is 2.1% Social Security predicts DI to go belly up around 2020
THE PROBLEM
The problem is OASI and DI will be unable to meet 100% of obligations in 2014-2105 without resorting to redeeming US Treasury Notes. These two programs will be unable to pay 100% of benefits past 2032-2034 due to projected zero balance in both Funds.
THE CAUSE
The cause if very simple but people keep missing it. The cause was insufficient FICA tax initially. The FICA tax originally should have been a minimum of 6-7% based on the change in wages and US treasury note the fund could earn. It was only 2% for the first 13 years and then raised to 3%. Furthermore, it enrolled more workers into the program with the same formula. The formula rewards substantially more for lower AVERAGE INDEXED WAGES. This was a huge unfunded liability.
As the OASI program began to run actual cash negative flows in the 50's, 60's, 70's and 80's the OASI tax was raised considerably. As a result a cry went up for tax cuts because OVERALL federal taxes were to high. Instead of cutting benefits, they raised benefits and cut FEDERAL INCOME TAX REVENUES. This kept TOTAL FEDERAL REVENUES THE SAME. The result was a deficit on the General Expenditure side and a surplus on the OASI side.
Had OASI taxes not increased, there would have been no cry for reduced FEDERAL TAXES and the deficits on the GENERAL EXPENDITURE side would not have occurred. DEFICITS IN SOCIAL SECURITY WOULD HAVE BEEN HUGE.
The question is, would workers have stomached the huge FICA taxes to support these deficits and let the program go under? The answer was yes and no. They agreed with supporting Social Security 100%, but no longer wanted to support GENERAL EXPENDITURES 100%.
FACTS
OASI is going to go under without changes.
It would take a tax increase of $10 Trillion in 1999 to fully fund OASI only.
It would take a Rate of Return on the OASI fund balance and cash flow of 15.83% a year till 2100 to make the OASI fully funded.
Opening or diverting money to special accounts will reduce the OASI cash flow and cause collapse much earlier. To avert collapse, these accounts would have to make up for a minimum of the cash flow required to make OASI solvent. The required minimum rate of return based on current OASI formula is 15.83% on all cash flows and current funds. If the entire cash flow and funds are not put into these alternative accounts and the alternative accounts earn less than 15.83% return each year, the program will have the same problem in the future as we have now with one exception. The exception is just as with each previous impending bankruptcy of the system, each fix made the next impending bankruptcy that much more difficult to overcome.
The money you would have people save must come from some place. It must be new money. You can not just reshuffle the current cash flow and funds to make the problem go away. These funds are already accounted for. Furthermore, the current funds are nothing but IOUS. This means even if they were real funds like stocks, the system is still horribly short by $10 Trillion. Without the funds the system is short by $10.65 Trillion. NOT MUCH DIFFERENCE.
In other words, the so called trust funds are actually meaningless. It would be like trying to buy a $100 K house with no money down with a current income of $10,000 and a rate of 7%. You could not even pay the interest each year. No matter how much you want the house, the only way you would get it is to stop eating and buying anything and then you would not enjoy it for long.
The only solution is to cut benefits. Raising taxes will only raise the cry for tax cuts. The only tax cuts around are other Federal Revenues and the general expenditure side is already cash negative. This does not work. Look at the history of FICA increases since 1970!
Raising the retirement age makes the system a lottery. If you live long enough, you might get something. It would make an already bad deal just plain terrible. Not only this, but it is a tax increase on workers.
Applying OASI tax rate to all wages would raise $54 billion a year which is $646 billion shy of what is needed just to maintain equilibrium. You are only throwing good money after bad. A MONEY PIT!
Applying OASI tax rate on interest, dividends and capital gains would raise about $400 billion tops. However, the effective capital gains tax would then go from 20% to 35.3%. People would stop selling stock as much and revenues would drop. Look at history. It could also trigger an unpleasant period of time also.
CUT CURRENT BENEFITS. CUT CURRENT BENEFITS. CUT CURRENT BENEFITS.
MEANS TEST BENEFITS. MEANS TEST BENEFITS. MEANS TEST BENEFITS.
