Notch Issue
The “notch issue” is one I hear about frequently from seniors in
my district. Amendments enacted in 1977 to the Social Security Act substantially
altered the way benefits were computed, beginning with people who became eligible
for Social Security in 1979. For retirees, this affected people born after 1916.
While this action was taken by Congress long before I was elected, I know the "notch" issue
has been a long-standing and contentious problem. Individuals born between 1917
and 1926 -- the "notch" years -- are concerned that the changes in
the rules caused their benefits to be lower than those of retirees who were born
before them. Very high inflation then caused a hike in benefits for retirees
born after them.
“Notch Babies” as they are often called, frequently receive literature
in the mail from groups that purport to lobby members of Congress on their
behalf and request donations for this service. While there are some legitimate
advocacy organizations that use contributions judiciously, I strongly urge
my constituents to research any organization that asks them to send money to
lobby on this issue. I suggest that anyone who is approached by these organizations
ask if most of their donations go toward lobbying efforts or toward their own
administrative costs, salaries, and other expenses. My constituents can advise
me of their opinions simply by calling my office, writing, or emailing me.
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Privatization
I oppose any plan that puts the future of Social Security at risk. It is
an important social safety net, and everyone who has worked hard to contribute
to the system should receive their fair share when they retire.
Changing the Social Security system so that a person could opt out of receiving
benefits and create individual investment accounts would affect groups of Americans
in different ways. Certainly, those who work their entire adult lives, invest
well, and are able to retire when their investments are doing well, will benefit
greatly from private investment accounts. However, many Americans will fare
far worse with private investment accounts than they would with traditional
Social Security. Among those who would be harmed are: those who retire during
a market downswing; those who do not invest their resources well; those (disproportionately
women) who interrupt their earning years to raise children; and those with
disabilities who may have significant periods of unemployment or may have to
stop working years before typical retirement age.
In addition, the future of disability and survivors’ benefits would
be in jeopardy if individual investment accounts are created. We must ensure
that people who are unable to work due to physical or mental impairment, and
families who have lost loved ones who were their primary means of support,
have guaranteed assistance when they need it most.
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Social Security Primer
History of the Social Security Program
Social Security is a lifeline: In 1935, after bank failures and a stock market
crash had wiped out the savings of millions of Americans, the nation turned
to Washington to guarantee the elderly a decent income. In those days, only
a handful of workers had access to pensions from their employers or through
State governmental pension programs. Over half of America's elderly lacked
sufficient income to be self-supporting. The Social Security Act was enacted
at the urging of President Franklin D. Roosevelt to create a social insurance
program that would ensure workers would have a source of income after they
retired.
In the decades that have followed, Social Security has become one of the federal
government's most popular and essential programs. Despite all our efforts to
encourage savings and investment, the private retirement picture has not changed
much in recent decades. Even today, barely half of all workers have access
to retirement plans at work, and millions reach retirement age without enough
private savings to provide an adequate living in retirement. Social Security
is still the foundation for most seniors' retirement. Without this critical
safety-net program, over half of all older Americans would fall into poverty.
More than many other federal programs, Social Security does exactly what it
was designed to do – it gives retired people a secure, basic income for
as long as they live.
Social Security is flexible: Over time, Congress has made changes to the Social
Security program in order to adjust to changing times. In 1965, for example,
the Medicare program was added to provide universal, affordable health care
benefits to retirees.
The last major changes to the program came in 1983, when the Social Security
program was facing imminent insolvency. At that time, Congress passed a package
of changes recommended by the National Commission on Social Security Reform,
also known as the Greenspan Commission. Among its major provisions, the amendments
accelerated previously scheduled increases in the payroll tax to its current
level, began a very slow phase-in of a two-year increase in the retirement
age (from age 65 to 67) over a 45 year period of time, covered federal employees
for the first time, and enacted a tax on some of the Social Security benefits
of higher-income retirees. These changes were intended to prepare Social Security
for the anticipated retirements of the baby boom generation and extend the
solvency of the Trust Funds for 75 years.
Social Security Benefits The Social Security system contributes to the well
being of Americans by providing a foundation of retirement income that permits
seniors to live in dignity, while also providing support to younger family
members who may have caregiver responsibilities. In addition to retirement
and spousal benefits, workers receive insurance protection that benefits workers
and their dependents if the wage earner becomes disabled or dies. In fact,
38 percent of Social Security benefits go to disabled workers, families of
retired or disabled workers, and survivors of deceased workers. No other wage-replacement
program – public or private – offers the protection Americans receive
from the Social Security program.
At the end of 2003, 47 million people were receiving Social Security benefits:
33 million retired workers and their dependents, 7 million survivors of deceased
workers, and 8 million disabled workers and their families. During the year,
an estimated 154 million people had earnings covered by Social Security and
paid payroll taxes.
To qualify for retirement benefits, a typical worker must have earned 40 Social
Security credits, which usually requires 10 years of work. Contributions are
made through payroll taxes, divided between workers and their employers. Employees
pay 6.2 percent of their incomes (up to a ceiling of $87,900 in 2004), with
employers contributing another 6.2 percent. Self-employed workers pay 12.4
percent of their income, all subject to the same ceiling.
Social Security benefits are based on the amounts earned during the worker's
employment, adjusted to make sure that the benefit keeps up with the overall
growth in wages in the economy during the employee's working years. Adjustments
are also made to give a higher proportionate benefit to low-income workers.
This feature is particularly important to women, who typically earn less than
men over their lifetimes. Initial benefits are increased each year through
cost of living adjustments (COLAs) to keep up with inflation after retirement.
In 2004, the average monthly retirement benefit for a man is $1,040 and for
a woman just under $800. Disabled workers average $860 monthly, while the benefit
for a young widow or widower with children averages $1,835 per month. The value
of the life insurance provided to survivors through Social Security is over
$400,000, and the value of disability protection for a young disabled worker
with a spouse and 2 children is over $350,000.
Social Security's Finances
When working Americans pay their Social Security payroll taxes to the United
States Treasury, those taxes are credited to the Social Security Trust fund.
Most of those taxes are paid out monthly in Social Security benefits. Money
left over is credited to the trust fund and invested in U.S. Treasury bonds
called “special issue” U.S. securities. These securities earn interest
that is also credited to the trust funds. These obligations – or debt – owed
to the trust fund by the Treasury are recognized by Congress as part of the
national debt. On a regular basis, Congress authorizes that debt, along with
all the other debt of the United States, when legislators raise the national
debt ceiling.
Total income to the Social Security Trust Fund from payroll taxes in 2003
was $632 billion and benefits paid totaled $471 billion, resulting in a surplus
of $161 billion. The Trust Funds were credited with $85 billion in interest
from earnings, which represented an effective annual rate of return of 6%.
Surpluses over the past two decades built up the assets in the trust funds
to over $1.5 trillion by the beginning of 2004. These surpluses will continue
for the next decade, increasing the asset amount to almost $3.6 trillion by
2013. Every year, Social Security's actuaries estimate the program's long-term
finances under a variety of economic assumptions for the next 75 years. The
Trustees currently project that Social Security's surpluses will end by the
year 2018. At that point, first the interest income credited to the trust funds
and later the bonds themselves, will have to be made available to cover a portion
of the cost of benefits, rather than being used to cover other federal expenditures.
By 2042 – almost 40 years from today – the assets saved up in
the trust funds are projected to be exhausted, and only incoming payroll tax
revenues will be available to pay benefits. This income is expected to be enough
to pay over 70% of the promised benefits. While this shortfall poses a challenge,
it in no way constitutes a crisis.
The Importance of Social Insurance
Social Security was never intended to be an investment
program: Instead, it
is a contributory social insurance program, designed to protect workers and
their families from loss of income due to death, disability or retirement.*
Social Security is not a needs-based program. Rather, it is a true entitlement
program in which people earn the right to participate by working and contributing.
Unlike private retirement plans, Social Security has broader policy goals than
merely providing retirement benefits. Social Security was also established
to protect our most vulnerable citizens from falling into poverty, raise the
standard of living for lower-income workers, and provide financial security
to the spouses and dependent children in the event of a worker's disability
or death.
Under Social Security all workers contribute to a universal pool of funds
from which benefits are paid. Social Security financing is shared equally by
employer and employee, is portable from job to job, provides inflation-adjusted
benefits, and covers all earnings over a working lifetime up to the taxable
wage base. The benefit formula is weighted in favor of workers with lower average
lifetime earnings.
What Social Security means for seniors
Social Security is the cornerstone of retirement: From the program's beginning,
it was intended to be a base of protection, supplemented by private pensions
and savings, not an individual's sole source of retirement income. Today, nine
out of ten people over age 65 receive Social Security benefits. Two out of
every three Social Security beneficiaries receive over half of their income
from Social Security, and it's the only source of income for nearly one-in-five
seniors. Without Social Security, most older Americans would live in poverty.
Unlike virtually any other program, Social Security protects retirees from
the ravages of inflation. Seniors are more sensitive to increases in living
costs because they are no longer collecting paychecks – they are forced
to rely heavily on their savings and Social Security to keep up with their
expenses. Social Security has a built-in cost-of-living adjustment (COLA) so
that inflation does not erode the value of their benefits over time. While
these increases lag behind some expenses like the skyrocketing cost of health
care, they do help keep seniors from falling further behind. And unlike private
investments, they do it without putting the senior at any financial risk.
Social Security is particularly important to women
Women live longer than men: Statistics tell us that – on average – women
today who reach age 65 outlive men by four years. That is, women can expect
to live to age 85, while men are likely to live to age 81. The difference in
life expectancy between men and women is even larger for those under age 65.
And nearly three out of every four people age 85 or older are women. The evidence
of women's longevity is all around us – nursing homes are predominately
filled with women.
Women earn smaller paychecks than men: Women who are employed full-time earn
25% less than men. They are also more likely to have low-wage and part-time
jobs than men.
Women have more years out of the workforce than men: Women are more likely
than men to take time completely out of the workforce to raise children or
take care of elderly parents. The typical woman is in the workforce for 32
years, compared to 44 years for men. The shorter work history combined with
lower wages means that the lifetime earnings for women are lower than for men.
Social Security is the only program that is designed to protect workers with
lower lifetime earnings and non-earning years. When determining retirement
benefits, more credit is given for the first dollars of a worker's average
lifetime earnings than for higher levels of earnings, thus creating a bias
in favor of the lower-wage worker. Workers are also hurt less by years with
no earnings because benefit amounts are based on a worker's highest 35 years
of wages.
Women are less likely to have pensions and other savings: According to the
Institute for Women's Policy Research, only 38% of women today participate
in an employer pension plan, compared with 51% of men. Moreover, when a woman
does have a pension, it is likely to be smaller than a man's, for precisely
the same reasons that their Social Security benefits are likely to be lower
than a man's – they have lower lifetime earnings and are more likely
to work in jobs that don't offer pensions. In the case of pensions, however,
there's no built-in system that improves the benefit relative to earnings for
lower wage-earners as there is in Social Security, leaving women without that
important protection. Among today's retirees, the average private pension benefit
for women is less than half the amount it is for men.
Social Security is more than just a retirement plan
Social Security means life insurance for workers and
their families: One in
seven Americans will die before reaching age 67. Many workers do not have life
insurance to protect their families from the loss of the earnings of their
primary breadwinner. What workers may not realize is that their payroll taxes
entitle their families to survivor's benefits, providing life insurance protection
worth over $400,000.
Social Security means disability insurance for workers
and their families: Three out of ten of today's 20-year-olds will become disabled before reaching
age 67. Yet 75% of the private sector workforce has no long-term disability
insurance. Individuals with a prior history of medical problems or who work
in industries with a high rate of injury frequently find it prohibitively expensive
or impossible to obtain coverage. Many workers don't realize their payroll
taxes are also buying them this critical protection. For a young disabled worker
with a spouse and two children, the disability insurance value of the benefit
they get through Social Security is over $350,000. And, unlike private disability
policies and annuities, Social Security benefits are increased annually to
keep up with the cost of living. This protection is particularly valuable in
times of double-digit inflation such as we experienced in the late 1970's and
early 1980's.
The Drive to Privatize Social Security
Despite the 65-plus years of success Social Security has enjoyed, some individuals
and organizations, including President Bush and several members of Congress,
are promoting the concept of replacing all or part of the current Social Security
program with a system of individual retirement accounts. Although these proposals
vary, most would divert funds from Social Security into individually-owned
accounts, thus transferring investment risks from a pool of all workers to
the individual. While individual accounts are often presented as a way to "save" Social
Security, diverting money to individual accounts actually worsens Social Security's
long-term projected shortfall.
Privatizing Social Security takes money out of the Trust
Fund: What those
who promote privatization want to do is take money out of Social Security and
have people invest instead in Wall Street. They promote their plans by telling
people they will have their own individual investment accounts to save for
their retirement. But what they often fail to say is that they finance these
investment accounts by taking money out of the current Social Security system.
Because so much of the money workers pay into Social Security is used to pay
benefits for current retirees, the disabled, their family members and survivors,
money diverted from the trust funds will need to be replaced to keep existing
benefits from being reduced. One proposal to divert two percentage points of
payroll from Social Security into individual accounts would cost about $1 trillion
over the next decade. Complete privatization could cost as much as $9 trillion.
If Social Security is privatized, taxes would have to be increased significantly,
massive new government debt would be incurred, or guaranteed benefits dramatically
scaled back.
To avoid increasing taxes or reducing benefits, some of those promoting privatization
are counting on the general Treasury of the United States to make up the difference.
Or in other words, they would require every taxpaying American to pay twice
to finance this risky experiment – once through their payroll taxes and
again through income tax increases to pay off the extra borrowing. The alternative
is to pass even more debt along to our children and grandchildren.
In return for paying these transition costs, future retirees would be guaranteed
lower base benefits than under current law. The base benefit would be supplemented
by the proceeds of the individual accounts, which may or may not be adequate
to provide reasonable benefit levels throughout that worker's retirement. Indeed,
several studies suggest that even with the proceeds of the individual accounts,
many workers will face retirement with fewer assets. In fact, a 1998 study,
conducted by noted economist John Mueller and commissioned by the National
Committee, concluded that once the transition costs are factored in, nearly
everyone alive today would face retirement with fewer benefits under a partially
or totally privatized system.
Privatizing Social Security is bad for people in or nearing
retirement: No
matter how much privatization promoters may claim that their plans won't impact
current or near retirees, the truth is that diverting payroll taxes from the
trust fund places everyone's benefits at risk. Simply said: Social Security
will run out of money faster if the program is privatized. Under one plan (by
Peter Ferrara), so much money would be taken out of the Trust Fund that it
would be empty in 10 or 12 years (by 2015).
No one has a crystal ball into the future: Even those who time their retirement
carefully can't foresee what will happen in the stock market after they've
already left the workforce. If the market drops after a worker has retired,
he or she could see the value of their assets drop, leaving them with significantly
less income than they had planned to live on in retirement. Shifting savings
into bonds and other types of more “secure” investments poses its
own risks if earnings fall behind the rate of inflation. The biggest variable
of all, of course, is how long a person is going to live. Those who guess wrong
in a privatized world could easily outlive their assets. And while workers
can purchase an annuity to avoid that risk, it will cost money that will reduce
their nest eggs. Lifetime annuities are among the most expensive insurance
products to buy, precisely because they do guarantee a lifetime income, no
matter how long a person lives. Social Security does that already, and at no
extra cost to retirees.
Private accounts will cost more to run: Advocates of privatization assume
that a privatized retirement system would be more efficient and cost effective
than a government managed program. But in reality, Social Security's administrative
costs are very low, at less than one percent of income revenues. In comparison,
the Chilean system, which often is cited as a model for privatizing Social
Security, has average administrative costs of about 13 percent of worker contributions.
In Great Britain, administrative costs consume up to 20 percent of contributions.
Unlike private accounts, Social Security has no hidden fees or extra charges
that can deceive workers and divert money needed for their retirement. The
newspapers are filled with stories about Wall Street investors playing fast
and loose with people's money, even in supposedly “safe” mutual
funds. Special deals abound, and practices such as market timing put money
in the pockets of speculators at the expense of long-term investors. Placing
trillions of dollars more at the mercy of these industry practices, with little
ability to effectively monitor how they're treating worker's money, is a disaster
waiting to happen.
Footnote Reference:
“We can never insure one hundred percent of the population against one
hundred percent of the hazards and vicissitudes of life, but we have tried to
frame a law which will give some measure of protection to the average citizen
and to his family against the loss of a job and against poverty-ridden old age.” Statement
U.S. President of Franklin Delano Roosevelt upon signing the Social Security
Act, August 14, 1935.
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