October 19, 1998

Social Security - Introduction
by Al Levit (alanl@ix.netcom.com)

Social Security may not be as gripping a subject as soaring (or plunging!) Internet stocks, your first kiss, the President's private life, or the Spice Girls. But we wouldn't have written this series of articles for you if we didn't believe, as many others, that our Social Security system is in great need of repair -- and that with some Foolish logic we can mend it for future generations.

I have personally been working on these issues professionally for a number of years, and I think I have some fairly Foolish ways to remedy the sticky situation we find ourselves in. I recognize that many feel a sense of suffocation when presented with details about our Social Security problem. On these accounts, I've tried my best to present the statistics to you in a readable format and to make this series as sexy as possible. (Hey, I already worked the Spice Girls in!)

Social Security has probably been the most popular program ever sponsored by the federal government. It's been so electrifyingly popular that many routinely refer to it as "The Third Rail of Politics: Touch it and you die." Ever since January 1940, when Ida May Fuller received her first check for $22.54, Social Security has been helping our elderly meet their daily living expenses.

But for many years now, most people have had an uneasy feeling that our Social Security system isn't as stable as it needs to be. In 1983, changes were made to strengthen the system by increasing Social Security taxes and delaying some of the benefits. But the queasiness remains. In fact, in 1995 Sen. Alan Simpson (R-Wyo.) presented the Social Security Commissioner with a poll showing that more people under the age of 35 believe in UFOs than in the prospect that Social Security will pay them benefits upon retirement.

In this short series on the Social Security system, we'd like to offer:

1) Some basic facts and context on our Social Security system.
2) Some proposals for re-engineering the system.
3) My own long-term solution for the Social Security problem.

Just to be Foolish, I'll jump to the end right now and simultaneously provide a bit of a disclaimer: I believe it's still too early to decide upon a single effective solution to fixing the system. I will present a personal choice at the very end, but you'll have to read to there to get to the specifics. What you should know, however, is that there are a few, logical, reasonable solutions to the Social Security problem, and we can fix the problem if we focus our attention on it.

Our choices break down into three groups.

The first and traditional choice involves relatively minor adjustments to the existing Social Security system, almost always coming down to some combination of increases in taxes and reductions in benefits. This choice is about the distribution of pain, and can get reeeeaaaallly politicized.

The second choice is more radical, involving some degree of pre-funding of benefits in a manner similar to our existing IRA accounts. Currently, Social Security benefits are not pre-funded, as I'll explain in this collection. So this option has the great appeal of promising to deliver higher stock market returns on the funded assets -- over the long term. There are some dangers to this option, but it's one that's gaining momentum.

The third solution is a combination of the choices from the two groups above. Given the political nature of Social Security, the odds strongly favor a compromise solution in the end.

Now, my goal in these short articles is not to lay out a Foolish method to save Social Security. It's to give you the context and some numbers to help you make up your own mind because one thing is very clear to me -- the longer we bicker and delay on this, the greater the risk to youth in America. They may not be able to untangle the mess years from now without extreme pain.

The longer we wait to make a choice, the more costly it becomes. Thus, it is of fairly grave importance that a solution to Social Security be debated and implemented quickly. Until recently, that was almost an impossibility. Today, however, the stigma associated with discussing true Social Security reform has begun to fade -- as simple numerics get introduced. In fact, it's quickly becoming politically risky NOT to propose Social Security reform. With any luck, actual reform will follow within the next couple of years.

Before we begin, a few notes about myself. First of all, by profession, I'm a pension actuary. Actuaries are a relatively small profession, and we're considered experts in pension funding. Second, much of my data in this Social Security section has been cobbled together from the 1998 Trustees Report from the Social Security Office of the Actuary. All of it is available at www.ssa.gov. And finally, in addition to that background info, you should know that I'm 43 years old. A person's age can't help but influence his or her opinion on Social Security, which will become clearer as you read through this section. Now, let's move on and examine what Social Security really is.

Next -- How the Social Security System Works