Social Insecurity Looms For U.S.

Social Security, created in the 1930s as a social program to help alleviate poverty and unemployment during the Great Depression, is now funded through dedicated payroll taxes via the Federal Insurance Contributions Act.

The program covered unemployment insurance when the act was initially signed into law by President Franklin D. Roosevelt in 1935 as part of his New Deal reform. Today, the benefit areas cover retirement, disability, survivorship and death.

By payout, Social Security is the largest government program in the world and the single greatest expenditure within the U.S. budget. Its expenditure now is about 37 percent of the government budget, 7 percent of our gross domestic product, and the program is in serious trouble.

The program’s annual surplus nearly evaporated during 2009 for the first time in 25 years, according to USA Today. The Great Recession has led hundreds of thousands of workers to retire or claim disability insurance, and caused further stress on the system.

The recession’s impact is projected to be even greater this year and next according to the Congressional Budget Office. If unemployment continues in the double digits, Social Security may be paying out significantly more than it’s currently planning.

Steven Goss, chief actuary for the Social Security Administration, was quoted as saying: “Things are a little bit worse than had been expected. Clearly we’re going to be negative for a year or two”.

Since 1984, Social Security has taken in more in payroll taxes than it has paid out in benefits, resulting in a $2.5 trillion trust fund. However, since the government uses the fund to pay for other programs, it has had to increase taxes and implement spending cuts. If Social Security can’t stay in the black, it will have to borrow money from other sources to make up the shortfall.

Experts following this situation claim this reinforces the concern that Baby Boomers (Americans born between 1946 and 1963) will create a deficit in the system by 2016 or 2017.

“The moment of truth has arrived,” says U.S. Rep. Paul Ryan of Wisconsin, a leading member on the House Budget Committee. He says it’s “a wake-up call” of things to come.

Last year, Social Security took in only $3 billion more in taxes than it paid out in benefits. That’s about a $60 billion decline from 2008, according to federal data. The decrease in revenue occurred much sooner than expected for three basic reasons:

• Previous to the recession, payroll taxes were growing at an annual rate of 4.5 percent along with wages but flattened during 2009 because of high unemployment and disappearing pay hikes.

• During the same period, the number of retired workers increased by 20 percent and those taking disability jumped to 10 percent.

• Monthly benefits were increased by 5.8 percent because of a spike in energy costs compared with the previous year.

Social Security previously was saved from bankruptcy in 1983 by a bipartisan agreement that increased payroll taxes and gradually shifted the retirement age to 67. This move was supposed to keep the system solvent until at least 2058, but the forecast has slipped to 2037, according to government actuaries.

The impact of the current recession has been much longer and deeper than most analysts projected. Maya MacGuineas, president of the Committee for a Responsible Federal Budget , says, “Money has to be found to repay these trust funds.”

President George W. Bush proposed a voluntary private account in 2005, but the effort was rejected and stalled by Congress. President Obama has proposed a bipartisan budget commission be formed.

Obviously, the system is under severe stress and our quality of life is under siege. Instead of the bipartisan budget commission, we think a bipartisan employment commission is needed to create new jobs – and soon!

Note: This post comes to We Mean Business from TechMan, a contributor who blogs on a variety of business and business-related topics.