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FIGURE 37 (continued)
FIGURE 38 Such assumptions for productivity gains and the related linkage factors have been used, as a subsidiary procedure, to obtain estimates of the Gross National Product. Then, the long-range OASDI costs have then been expressed as a percentage of GNP. However, for the purpose of planning the financing of the OASDI program, by far the most important and critical measure is the relationship with taxable earnings, because the tax rates which finance the program are applied to such earnings. The most important linkage factors between real-wage growth and productivity are the following: (1) relative growth of nontaxable fringe benefits as a proportion of total compensation, (2) the average number of hours worked per week, and (3) the average number of weeks worked per year. In the intermediate cost estimate (Alternative ll-B), when GNP was estimated from the primary assumptions as to real-wage differentials, the result of the linkages was an ultimate (1992 and after) rate of productivity gains of 2.2% per year. This figure was derived from the real-wage differential of 1.5% per year by increasing it by .4% for the relative annual growth of fringe benefits, by .2% for the average number of hours worked per week, and by .1% for the average number of weeks worked per year (the net effect of other linkage factors than the three which were used was considered to be negligible). Consideration of these two figures can lead to greatly different conclusions. On the one hand, it could be argued that the difference of .7% between productivity gains and real-wage growth is too large and that,... Appendix J, page 29 _________________FIGURE 39________________ ... therefore, the real-wage differential used should tie higher than 1.5% — which would produce a considerably more favorable financial picture for the OASDI program than is currently estimated. On the other hand, it could be argued that the assumed ultimate productivity rate of 2.2% is too high and that then either (1) the several linkage factors are overstated, and the real-wage differential of 1.5% is satisfactory, or (2) the linkage factors are appropriate, but the real-wage differential should be lower than 1.5% — which would produce considerably less favorable financial picture for the OASDI program than currently estimated. The estimates of GNP that have been derived from the basic actuarial estimates expressed as percentages of taxable payroll can be used to compare cost of the OASDI system with GNP. According to the intermediate cost estimate such cost is currently about 5.2% of GNP and will decrease slowly for the next 20 years, reaching a low of about 4.4%. It will increase to 6.1% in 2030, then again decline slowly, to about 5.5% at the end of the 75-year valuation period. Under the pessimistic estimate, the cost of the OASDI program percentage of GNP remains relatively level at slightly more than 5% for the next 25 years, but it continuously increases thereafter to about 8.6% at the end of the valuation period. On the other hand, under the optimistic cost estimate (Alternative I), such ratio decreases slowly in the next few years, reaching a minimum of slightly less than 4% of GNP after 20 years and then slowly rise... __________________Appendix J, page 30________________ _______________FIGURE 40_________________ ... to somewhat more than 5% in the 2020s; thereafter, it decreases to somewhat less than 41/2% ultimately. Appendix J, page 31 GEE, IF GOVERNMENT EXPERTS CAN UNDERSTAND ALL THIS, WHY DIDN'T THEY UNDERSTAND THAT THE OASI "TRUST FUND" WOULD BE DEAD BROKE BY 1982?! One Picture Worth A Thousand Words Proving the Chinese proverb that says "One Picture is Worth a Thousand Words" (or in the case of this report 50,000 words), I submit the Committee's own exhibit, "Who Pays for Social Security", which appeared on page (7)-26 of the report (see Figure 28). Couldn't the Committee have figured out just from this one graph that there is no logical, legal or economic way that "2 or 2-Vz or 3 or 3.3" Americans can be compelled to support another? Remember, in 1950 Social Security might have been palatable because such a recipient was being supported by 16-Mz workers; but can the government force two American workers to support a third—when such workers might, themselves, not be able to afford a house, a car, or their own fuel bill? Such a conclusion doesn't require any particular expertise, just a little common sense. Yet this panel of "experts" wants the public to believe that such a situation is not only economically feasible but also legal!? Prior Government Committees and Studies One need only examine the reports from a few government hearings to be fully convinced of the Federal government's culpability in connection with the Social Security fiasco. For example: Testifying on May 27, 1976 before the Joint Economics Committee, W. Allen Wallis (Chancellor, University of Rochester and Chairman of the 1975 Advisory Council on Social Security) stated: "Many people think that the Social Security taxes taken out of their wages and sent to Washington each month provide for their old-age pensions and other Social Security benefits. This simply is not the case. Those taxes are levied on workers in order to pay benefits to people who already have retired and are drawing their Social Security pensions, or to pay other Social Security benefits to those who already are drawing them ... When you pay Social Security taxes you are in no way making provision for your own retirement. You are paying the pensions of those who already are retired. Once you understand this, you see that whether you will get the benefits you are counting on when you retire depends on whether the Congress will levy enough taxes, borrow enough, or print enough money, and whether it will authorize the level of benefits you are counting on. The situation is in no way analogous to putting money each month into a private insurance company which invests it and undertakes to pay you an annuity. Misunderstanding of the pay-as-you-go nature of Social Security is widespread among journalists and the public. 'Indeed, this misunderstanding seems to have been deliberately cultivated sometimes, in the belief that it makes the Social Security System more palatable to the public." (emphasis added) Note how Wallis complains that "misunderstanding of the pay-as-you-go nature of Social Security is widespread among journalists and the public." Why are such misunderstandings so wide-spread? Why doesn't the public know the truth about Social Security? Well, Wallis himself supplies the answers. He says the "misunderstanding seems to have been deliberately cultivated...". By whom? By the government, of course! The government knowingly and deliberately misled the public concerning a vital element in their financial future so Social Security would appear "more pallat-able to them". Wallis states that the "people think that the Social Security taxes taken out of (one's) wages are sent to Washington each month to provide for their old-age pensions...". Why wouldn't they think that? Look at those Social Security pamphlets on pages 227 and 228. The public is told in them that "Social Security contributions (go) into special trust funds" and that these "trust funds" are "soundly financed both for the short-range and long-range future". These government claims were, of course, all lies and were designed to "deliberately cultivate" the misconception to which Wallis refers. Should the culprits who deliberately cultivated these misconceptions go unpunished? What right did politicians and bureaucrats have to deliberately lie to the public in order to make Social Security "more pallatable"? The government's deliberate campaign to deceive the American public with respect to Social Security amounts to nothing less than criminal fraud. Why Bother With A Securities and Exchange Commission? If the Federal government can tax the American public (imposing all types of burdens on capital-seeking entrepreneurs) to support a Securities and Exchange Commission (which presumably protects them from stock swindles), why should it be at liberty to swindle far more from this same public through its own "retirement" scam? Note again Wallis' reference to the "pay-as-you-go" nature of Social Security. Is this the type of Social Security "funding" that the Supreme Court had in mind when it held Social Security Constitutional5 or what the nation had in mind when it bought the scheme?6 Report Of The Quadrennial Advisory Council Of Social Security — March 10,1975 Figures 41 and 42 are pages 45 and 46 of the 1975 Report of the Quadrennial Advisory Council of Social Security. Figure 43 is a list of the distinguished members and consultants who made up that Committee. Why didn't these "experts" honestly tell the American public (back in 1975) that Social Security was a scam and a fraud since that conclusion was inescapable from the evidence it had gathered? Note the Committee's clear admission that Social Security merely (Figure 41, [a]) "transfers money from one generation to another with the amount taken from one generation being measured by the other generation's benefit requirements.". Therefore, Social Security taxes are not collected for the "general welfare of the United States" but, admittedly, are used to pay cash benefits to certain segments of society at the expense and to the exclusion of others. Is this what the government argued before the court? Is this the basis upon which the Supreme Court found Social Security constitutional? And just who determines these "benefit requirements" anyway? The generation receiving the benefits? What legal argument can anyone advance to support the idea that one generation of Americans can 6 See pages 163-165. 8 See pages 102-105. The Chairman of the Council appointed a Subcommittee on Finance1 to review the financial aspects of the social security system. It was assisted by five independent professionals, two economists and three actuaries. In the limited time available, the review was necessarily concentrated on the OASDI program because it faces financing difficulties. The report of the Subcommittee will be summarized in this chapter, but for additional information on any particular item, the reader is referred to the Subcommittee's detailed report which is attached as Appendix A. section i. basic characteristics of old-age, survivors, and disability insurance program 1.1 CURRENT COST FINANCING The financing of the OASDI system is based on the "current cost" method. Under this approach, no fund is created during the life of a worker from which his benefits are ultimately paid. Instead the social security taxes he pays are immediately paid out by the government to persons who are already beneficiaries. His own benefits will be paid from taxes that are collected in the future from persons who are then working. The tax rate is set so as to provide tax receipts that approximate current expenditures. In essence, the plan transfers money from one generation to another with the amount taken from the one generation being measured by the other gen-eration's benefit requirements. FIGURE 4 (a) The current cost method would be unacceptable for a private pension (b) plan, but it is a sound alternative for OASDI; because the government has «-the continuing power to tax future workers in order to pay benefits in the Tuture to those who are now working. If OASDI were funded, in the (c) ,••} actuarial sense, by creating a fund of one or two trillion dollars, that fund ^. ^ ' would have to be invested.2 The largest part would almost certainly go into "~* government bonds because they are considered to be the safest invest-(e) ment. The value of such bonds, however, depends on the power of the ^ government to tax in the future. There would be, therefore, no really greater security behind the system than there is today, but the funding (f) would have a very real effect on capital formation in this country. «- In fact, even with the current cost method, the OASDI system has affected the capital formation of the country and will continue to 1 Members of the Subcommittee were Rudolph T. Danetedt, Elizabeth C. Norwood, and J. Henry Smith, with J. W. Van Gorkom as Chairman. 2 By comparison, the Federal debt outstanding at the end of fiscal year 1974 held by the public is estimated to be about $360 billion. (45) FIGURE 41 (continued) affect it in ways that are not clearly understood at this time. Since the formation of adequate capital for the nation's needs is a currently pressing problem, the Council strongly recommends that a study of the relationship between the financing of the social security system and capital formation be made at the earliest possible time. 1.2 MEASURING LONG-RANGE COSTS In discussing the "cost" of the OASDI system, the use of numbers in absolute dollars is of little help, because there are constant changes in the number of workers, beneficiaries, wage and benefit levels and other factors. Throughout this report, therefore, we will be expressing "cost" as a percentage of total covered earnings, meaning earnings subject to the OASDI tax. This is the measure of cost that will be used herein because it focuses attention on the size of the burden to be borne by each individual taxpayer and employer. As an example, the cost of the system in 1975 was 10.67 percent of covered earnings. Since total covered earnings in 1974 approximated $600 billion, absolute cost of the system in that year was around $64 billion. 1.3 OASDI TAX RATES The current tax rate for OASDI is 9.9 percent, payable on all earnings up to $14,000.3 The total tax is split equally between the employer and employee, with each paying 4.95 percent. (To this is added .9 percent for hospital insurance making a total social security tax of 5.85 percent borne by each.) The cash benefits tax rate for the self-employed was originally established at a level of 150 percent of the employee's tax. However, in recent years it has been frozen at 7 percent. FIGURE 42 1.4 WEIGHTED BENEFIT STRUCTURE While the tax rate for all employees is the same, the benefits are not equal. They are weighted in favor of lower-paid workers and those with dependents. The low-paid worker receives a benefit that is a higher percentage of his (or her) average earnings than does the higher-paid employee, even though the latter receives a larger absolute amount. This weighting of the benefit schedule represents society's recognition of "adequacy" as a ^ criterion of the plan, and is a departure from the strict principle of individual (g) equity. Another such social concept is found in the fact that a married worker receives certain protection for his dependents without paying any more premium than a single worker who receives no such protection. The entire social security program is necessarily a blend of social goals and individual equity. Maintaining the proper blend is very important if we are to sustain the workers' support of the plan. To date, most workers feel responsible for the system because, while aware of the social weighting within the program, they still view their protection as being reasonably (h) related to the taxes they pay. This attitude is important to the success of «_ social security. It becomes an important factor when considering the intro-duction of additional welfare-type benefits or methods of financing from general revenues. FIGURE 42 (continued) * The $14,000 applies to earnings of 1975. The amount rises each year in accordance with the increase in average wages in covered employment. MEMBERSHIP OF THE COUNCIL W. Allen Wallis, Chairman, Rochester, New York, Chancellor of the University of Rochester, and a former special assistant to President Eisenhower. Stanford!). Arnold, Brighton, Michigan, Secretary-Treasurer, Michigan State Building and Construction Trades Council, AFL-CIO. John W. Byrnes, Arlington, Virginia. Attorney; former U.S. Representative from Wisconsin and former ranking minority member of the House Ways and Means Committee. Rita Ricardo Campbell, Los Altos Hills, California, Senior Fellow, Hoover Institution, Stanford University; former member of President's Committee on Health Service Industry. Edward J. Cleary, Flushing, New York. Secretary-Treasurer, New York State Building and Construction Trades Council, AFL-CIO. Rudolph T. Danstedt, Bethesda, Maryland. Assistant to the President of the National Council of Senior Citizens. Edwin J. Faulkner, Lincoln, Nebraska. President, Woodmen Accident and Life Company. Vernon E. Jordan, Jr., White Plains, New York. Executive Director, National Urban League. (Mr. Jordan was unable to participate in the Council's work and was represented by Thomas E. Mitchell, Washington, D.C., Deputy Director, Washington Bureau, National Urban League.) Elizabeth C. Norwood, Washington, D.C. Assistant Research Director, Eastern Conference of Teamsters. 3 o § H rf*. CO John J. Scanlon, Fairfield, Connecticut. Executive Vice President and Chief Financial Officer (Ret.), American Telephone and Telegraph Company. J. Henry Smith, Maplewood, New Jersey. Chairman of the Board, Equitable Life Assurance Society of the United States. /. W. Van Gorkom, Lake Forest, Illinois. President, Trans Union Corporation. Arnold R. Weber, Vice Chairman, Pittsburgh, Pennsylvania. Dean, Graduate School of Industrial Administration, Carnegie-Mellon University; former Assistant Secretary, Department of Labor: former Associate Director, Office of Management and Budget. CONSULTANTS TO THE COUNCIL Philip Cagan, Professor of Economics, Columbia University. Hugh Conway, Economist, Office of the Secretary of Labor. Martin Feldstein, Professor of Economics, Harvard University. Robert Kaplan, Professor of Industrial Administration, Carnegie-Mellon University. Robert J. Myers, Professor of Actuarial Science, Temple University; former Chief Actuary, Social Security Administration. Sherwin Rosen, Professor of Economics, University of Rochester. Charles E. Trowbridge, Senior Vice President and Chief Actuary, The Bankers Life; former Chief Actuary, Social Security Administration. Howard Young, Consulting Actuary; Special Consultant to the President, United Auto Workers. |