Apr 29, 2005
Swiss America Research Report: PART I

The Social Security Crisis
and Proposed Solutions

Latest News ...

Bush Offers New Social Security Plan -AP
4-29-05 -- WASHINGTON (AP) - After nearly 60 days on the road pitching Social Security changes, President Bush is offering a new plan to fix its finances by cutting benefits of more prosperous future retirees. Democrats still aren't buying it. In a prime-time news conference, Bush refused to back off his desire to carve private retirement accounts out of Social Security. Democrats say those personal accounts are a deal-breaker that would keep most of them from supporting Bush's revisions. But for the first time he proposed changes under which Social Security checks for low-income workers retiring in the future would grow faster than those for people who are better off.

A PLAN TO UNITE AMERICA ON SOCIAL SECURITY - 2-4-05 By Craig R. Smith, CEO, Swiss America ... I want to applaud Bush's courage to take on Social Security reform, the so-called untouchable "third rail" of politics. In his State of the Union Address...
"Social Security, on its current path, is headed toward bankruptcy. And so we must join together to strengthen and save Social Security. Your money will grow, over time, at a greater rate than anything the current system can deliver and your account will provide money for retirement over and above the check you will receive from Social Security," -President GW Bush, State of the Union Address, 2/2/05

"Templeton Curve” helps decipher Social Security reform -- 1/11/2005 -- New analytical tool graphically displays 75 year cash flows of reform proposals. Let Freedom Ring, Inc. today proposed a new tool to compare the transition costs of various social security reform proposals and their impact on the long-term liquidity of the Social Security Trust Fund.

"Bush promises Social Security reform" -CNN, - Jan 11, 2005 NEW YORK (Reuters) - President Bush promised to offer an ambitious plan for overhauling Social Security soon, pledging to "provide the political cover" for nervous lawmakers, according to an interview published in the Wall Street Journal Tuesday. BUSH SPEECH TRANSCRIPT ... Bush Asks 'Safe Bet' Bennett to Save Social Security -Newsweek

"The Crisis is Now!" -GW BUSH
-CNN, Dec 16, 2004
"'Now is the time to work together to confront the problem,' Bush said. 'The crisis is now.' The president wants to let younger workers put some of their Social Security payroll taxes in private investment accounts. He has rejected raising payroll taxes to finance the costs of changing over to allowing private accounts, estimated at $1 trillion to $2 trillion."

Bush Social Security Plan Would Increase Deficit
-Bloomberg, Nov 30, 2004

"The U.S. government needs to reduce its large budget deficits to increase national saving and gradually trim the large current account deficit," Fed Chairman Alan Greenspan has warned repeatedly in recent speeches in Europe. Greenspan, in testimony in 1999, said, "The crucial retirement funding issues center on how to increase our national savings and how to allocate physical resources between workers and retirees in the future. We must endeavor to increase the real resources available to retirees without blunting the growth in living standards among our working population."

Alan Greenspan's Warning to Congress
-AP, Feb. 25, 2004

"Soaring budget deficits now threaten a very debilitating rise in interest rates in coming years… As 77 million of the baby boom generation become eligible for Social Security starting in 2008, this dramatic demographic change is certain to place enormous demands … demands we will almost surely be unable to meet unless action is taken … as soon as possible, the country will go from having just over three workers supporting each retiree to 2.25 workers for every retiree by 2025."


Social Security won't exist in the form we know it now for much longer. Greenspan knows it ... Pres. Bush knows it ... and 4 out of 5 Americans already suspect it. The so-called “third rail” of politics is about to derail unless immediate action is taken.

Soon 77 million baby-boomers will begin to retire and the BIG QUESTION IS ... What can we to do to avoid a retirement funding crisis ... NOW?

Our research indicates that, so far, neither political party has a viable solution to the Social Security funding crisis. The reason is that so far none of the reform proposals have gone far enough in reforming a system that was fatally flawed from the beginning.

The purpose of this Special Report is to examine the possible solutions to the emerging Social Security crisis before it becomes the worst financial disaster Americans face in the next 10-20 years.

Social Security is the single largest item in the federal budget, consuming over 22% of total expenditures. For comparative purposes, 17% of the budget is spent on national defense. It's time to get the government's hands out of our pockets and instead to allow free market privatization of our retirement options. Americans must become financially responsible and hold leadership accountable for spending and debt abuse.

After reviewing the history of the problem and some of the proposed solutions we will offer our own humble suggestions regarding what can be done - whether you are already retired, preparing to retire, in your prime working years or you are just beginning to work.


In 1936, America re-elected Franklin D. Roosevelt to a second term, despite claims that FDR was a socialist who was trying to pattern the U.S. after the Soviet Union's image. With FDR's newly established Social Security Administration - often referred to as the "cornerstone" of the "New Deal" - in place, America was brimming with hope and ready for change.

The U.S. government spent millions to help what FDR referred to as "One-third of a nation illhoused, ill-clad, ill-nourished." FDR created the United States Housing Authority to make low-income housing more affordable. Gone With the Wind was a best-seller and Look magazine debuted. Amid the Depression bread lines, violent Union labor strikes, droughts, floods and the Hindenburg explosion, was a nation determined to keep its chin up.

"Brother, can you spare a dime?" became a familiar phrase reflecting The Great Depression era.

The following time line will provide a helpful overview of just how The Social Security System, launched in earnest almost 70 years ago has grown from a payroll tax of 2% to a payroll tax of 12.4% today ... and has now become one of the biggest liabilities in American history.

1935 - The Social Security Act, which covered workers in commerce and industry, was signed by President Roosevelt. Life expectancy, age 62.

1937 - The Federal Insurance Contribution Act (FICA) required workers to pay taxes to support the Social Security system. Payroll taxes were 2%.

1939 - Social Security was expanded to cover dependents and survivors. Payroll taxes were 2%.

1950 - Coverage was expanded to jobs outside of commerce and industry, and benefit levels were increased. Payroll taxes were 3%.

1956 - Disability Insurance was created, and expanded over the following years. Early retirement at age 62 for women was permitted. Payroll taxes were 4%.

1961 - Early retirement at age 62 for men was permitted. Payroll taxes were 6%.

1972 - Automatic cost-of-living-adjustments (COLAs), which index benefits to inflation, were introduced. The formula to calculate increases initially overstated inflation by 25%, and people born between 1910 and 1916 received an unintended windfall. Payroll taxes were 9.2%.

1977 - The mistake in the benefit formula was corrected. The "notch" refers to the difference in benefits paid to the group that received the windfall and those who retired following the formula correction. Social Security was thought to be actuarially sound. Payroll taxes were 9.9%.

1983 - The National Commission on Social Security Reform was created in response to the actuarial unsoundness of the system. The commission called for 1) and increase in the self-employment tax; 2) partial taxation of benefits to upper income retirees; 3) expansion of coverage to include federal civilian and nonprofit organization employees; and 4) an increase in the retirement age from 65 to 67, to be enacted gradually starting in 2000. Again, Social Security was declared actuarially sound. Payroll taxes were 10.8%. Mr. Greenspan chaired the commission and supposedly put the system on sound fiscal footing that would take it well into the current century. However, within a decade it was clear that Social Security was still in as bad a shape as ever.

1985 - The Social Security Trust Funds were moved "off-budget" so that the funds earmarked for the Social Security system would be tracked separately from the rest of the budget. Payroll taxes were 11.4%.

1986 - COLAs were increased to respond to minor levels of inflation. Payroll taxes were 11.4%.

1993 - The amount of taxable benefits for upper income retirees was increased to 85%. Payroll taxes were 12.4%.

1996 - The Social Security Trustees' Report stated that the Social Security system would start to run deficits in 2012, and the trust funds would be exhausted by 2029. All members of the Advisory Panel agreed that some or all of Social Security's funds should be invested in the private sector. To keep the unchanged system actuarially sound, payroll taxes would have to be increased 50%, to 18% of payroll, or benefits would have to be slashed by 30%.

1997 - All members of the presidentially-appointed Social Security Advisory Panel agreed that some or all of Social Security's funds should be invested in the private sector. To keep the unchanged system actuarially sound, payroll taxes would have to be increased 50%, to 18% of payroll, or benefits would have to be slashed by 30%." Then President Bill Clinton credited Social Security with "changing the face of America" since its creation by President Franklin Roosevelt 60 years ago. Seniors then were very poor, said Clinton, who quoted a letter written by one senior to Roosevelt asking him to eliminate "the stark terror of penniless old age." Mr. Clinton proposed setting aside any budget surpluses to bolster Social Security until a long-term solution is found. Republicans instead want that money to be given back to Americans to start their own retirement accounts. Other reforms to reduce expenditures include gradually raising the age recipients begin to receive benefits from 65 to 67, lowering annual cost-of-living increases and limiting benefits based on a recipient's other income and assets.

1999 - The Social Security Trustees' Report stated the Social Security Retirement System's unfunded liability increased by $752 billion since the 1998 Trustee Report was published. This brings the total long-term unfunded liability to more than $19 trillion. [1]

May 2, 2001 - President Bush announced establishment of a bipartisan, 16-member Commission "to study and report specific recommendations to preserve Social Security for seniors while building wealth for younger Americans." The Commission was asked to make recommendations to modernize and restore fiscal soundness to Social Security, using six guiding principles:
· Modernization must not change Social Security benefits for retirees or near-retirees.
· The entire Social Security surplus must be dedicated only to Social Security.
· Social Security payroll taxes must not be increased.
· The government must not invest Social Security funds in the stock market.
· Modernization must preserve Social Security`s disability and survivors insurance programs.
· Modernization must include individually controlled, voluntary personal retirement accounts, which will augment Social Security.

Commission co-chairmen, former Sen. Daniel Patrick Moynihan, D-N.Y., and Richard Parsons, an executive at Time Warner and a Republican concluded; "The system is broken, workers and retirees do not own their benefits and have no legal claim to them."


Did you catch that last statement? In other words, Social Security is not a nest egg for retirement. Retirees have no legal claim to anything in the Social Security system. The presidential commission's makes this point in the following paragraph:

"What they have is a political promise that can be changed at any time, by any amount for any reason,” said the report, written by staff members with input from commission members."

Irwin Schiff, author of THE SOCIAL SECURITY SWINDLE makes a critical point and explains this little know fact further …

“Social Security - as the laws are written - is in fact an income tax, and the government itself has argued in court filings that there is NO LINKAGE between the tax and the "benefits" paid out, which may be changed or eliminated as any future Congress sees fit.

Remember, this was not an argument presented by those OPPOSED to Social Security. The fact that the government can, at any future time, restrict, alter, withhold or eliminate benefits - that there is no "contract" with any individual "contributor" involving his or her completely mythical personal "trust fund" - was argued, asserted and sworn to BY THE GOVERNMENT.

In the 1937 Davis cases, attorneys for The United States told the Supreme Court that Davis was wrong when he argued Social Security taxes were unconstitutional because they were ear marked for specific purposes. Not so, the federals insisted. Rather, they are "true taxes, the purpose being simply to raise revenue. No compliance with any scheme or Federal regulation is involved. The proceeds are paid, unrestricted, into the Treasury as Internal Revenue collections, available for the general support of government ..." which is precisely the way Congress has used them ever since, of course.

You DID learn all this in your government classroom ... didn't you?

In order to get Social Security through the courts on constitutional grounds, the government had to argue a position exactly opposite from what it has been telling the public!”

The author explain how Social Security - the biggest Ponzi Scheme in history - was sold to a trusting public, how the squandering of Social Security funds invites further government abuses and why Social Security must be voluntary to be constitutional.

“Social Security ... like socialism itself ... owes its very existence to public ignorance and gullibility.”

Keep in mind that Medicare and Social Security are legally off-budget, which means that their massive debts are not counted by the statisticians when they estimate the official debt of the U.S. government. This, despite the fact that all income from the FICA and Medicare taxes - excuse me, “contributions” - that is not paid out to recipients is put into the government's general fund, counted as income, and immediately spent.

The Treasury then issues nonmarketable IOU's to each of the programs' slush funds - excuse me, “trust funds.” In this way, the government converts what would otherwise be a short-term on-budget debt to a long-term off-budget debt. The public doesn't understand this sleight-of- hand operation, so there is no outcry. [2]

Well, I say: Let the public outcry begin! Even the U.S. Comptroller, David Walker, can no longer hold his tongue. On Jan. 23, 2004 he issued a stinging attack on the deficit, under funded SS and Medicare trust funds published in the Post;

“In the case of the Social Security and Medicare trust funds, the federal government took in taxpayer money, spent it on other items and replaced it with an IOU. Given this fact, why aren't the amounts attributed to such activities shown as "Liability of the U.S. Government?" "At present time they are not. These additional amounts total tens of trillions of dollars… They are likely to exceed $100,000 in additional burden for every man, woman and child in America today, and these amounts are growing everyday." The alternatives to a budget disaster are "INFEASIBLE." [3]


• More than 47 million people will collect Social Security benefits this year.

• The full retirement age is 65 years and 4 months. It rises two months each year, increasing to 67 for born after 1959. 2004 life expectancy, 76.

• The program is projected to pay more in benefits than it will collect in payroll taxes in 2018.

• Social Security’s projected shortfall over 75 years is $3.5 trillion.

• The program is a pay-as-you-go system in which current workers fund benefits for current retirees. In 1950, the ratio was 16 workers to 1 beneficiary. In 2003, it was 3.3 workers. In 2033, it will be 2 workers.

• The average monthly retirement benefit was $879.70 as of January, 2004.

• By 2030, there will be over 70 million Americans of retirement age.

According to Social Security Researcher, Bob Sherman, this is just the tip of the iceberg …

As a working person who is concerned about retirement security, I am especially concerned and incensed at Congress and the Federal government for collecting excess Social Security “contributions” and placing them into a mythical Trust Fund. The net effect of these excess “contributions” is to artificially reduce the Federal deficit--without any savings accumulation for future Social Security benefits.

These are the Facts:

• Excess Social Security contributions, coming from equal amounts paid by employee and employer taxes, currently provide more money than is spent on Social Security benefits.

• The Social Security Trust Fund has accumulated about $2.6 Trillion Dollars worth of excess Social Security contributions.

• Increasing numbers of retirees will cause higher Social Security expenditures after 2012 that will exhaust the 2.9 Trillion Dollars in the Trust Fund around 2030.

• The excess Social Security contributions said to be in the Trust Fund have already been placed in the General Fund and have been spent.

• The more than 100 Billion Dollars in annual excess Social Security contributions have been used to reduce the Federal deficit or produce a "surplus." (The deficit or surplus is basically the amount of money deposited in the general fund minus the amount of money spent.)

• The Federal government places nonnegotiable government bonds in the Trust Fund.

• Government bonds are essentially IOUs that the Federal Government will attempt to honor through its taxing power, borrowing ability, and money printing authority. [4]

I don't know about you, but right about now, I'm astounded that We the People have bought into a system that we've been told is fundamentally sound, when in fact it offers no guarantee to any worker - except to go bankrupt within the next 25 years!

What is the President's latest response to the growing chorus of Social Security critics and realists like Alan Greenspan? Following Greenspan's testimony last week, The While House held a Press Briefing by Scott McClellan. Here is portion of the dialogue that went on …

MR. McCLELLAN:... The President has made it very clear that, as part of our efforts to strengthen and reform Social Security, we should allow younger workers the opportunity to invest a small portion of their retirement savings in personal retirement accounts. And the President talked about how voluntary personal retirement accounts will allow those who choose the potential to realize an even greater rate of return on their savings. That's part of our efforts to save and strengthen Social Security.

Q. Record deficits that the federal government is running now appear not only to be having an effect on the debt, but, according to Chairman Greenspan, may have an effect on Social Security. It seems to me as though that's a pretty big bombshell to be dropped on your head in the middle --

MR. McCLELLAN: Well, you're talking some short-term issues (deficits) and you're talking some long-term issues (Social Security/Medicare) that need to be looked at. The President's Commission on Social Security Reform went in and looked at a variety of ideas and the commission came back and said there needs to be a national dialogue on this issue. Members of Congress are starting to put forward ideas. So there is some movement to address this important issue.

Does that that fill your heart with hope that a solution is forthcoming? Me neither!

Jagadeesh Gokhale, a scholar at the conservative American Enterprise Institute (AEI), has suggested that the shortfall in unfunded future Social Security and Medicare benefits could total a whopping $44 trillion without the prescription drug bill and $51 trillion to $56 trillion with it. "The Medicare prescription drug benefit advancing through Congress will cost much more, and do less good, than many legislators realize," Gokhale told a congressional subcommittee this summer reports CNN.

Last December, Fortune magazine did an expose on the Social Security/Medicare Crisis entitled “The 44 Trillion Abyss” ...

The baby-boomers are about to retire, and it's going to cost us-big. Here's what the govern ment doesn't want you to know. Last fall Paul O'Neill, then Secretary of the Treasury, wanted a simple answer to a thorny question: How prepared was the nation today to pay all its future bills? Two government experts worked for months to calculate the answer. Their findings, which shocked even them, were never published-the Bush administration made sure of that. The reason for the silence was that by the time the two researchers had completed their study, O'Neill had been thrown out of the Treasury and replaced by the more politically astute John Snow. No savvy administration power player would dare point out, right in the middle of tax- cut season, that there was a huge hole in the country's finances - a $44 trillion hole. [5]

We are staring at a slow motion train wreck in progress and no politician has the guts to say it - especially in an election year! But at this point the number are just getting too big to comprehend for most people, so we do nothing.

Those presently receiving SSI payments could be in serious jeopardy, not only from reduced benefits, but from reduced buying power of their existing benefits from a falling U.S. dollar -- and the government is powerless to do anything about it now because of the huge Budget and Trade deficits we are now facing.

Decreasing fertility rates (see chart) illustrate the decline of America’s family ethic. We are witnessing a Baby Boom gone bust.

Derek Bok, President Emeritus, Harvard University and founder of The Global Generations Policy Initiative says ...

"With the aging of the baby boomer generation, Americans will witness a societal transformation of unprecedented size and scope. Since the vanguard of the boomer bulge will reach 65 as early as 2011 and the populations of numerous countries around the globe are aging rapidly as well, lead-time is short and the problems myriad."

OK, enough overview of the emerging Social Security Crisis, let's now look at some of the many proposals for Social Security reform from both the government and the private sector that could help soften the blow in the near term and perhaps help reform the system over the longer term.

[1] Social Security Reform Center
[4] Bob Sherman, SS Researcher
[5] “The 44 Trillion Abyss” -Fortune magazine, 12/15/03
12-9-04 -- Distractions in the Social Security Debate -Hans F. Sennholz, Mises.org ...The following proposal hopefully may shed some light and point to a peaceful order. 1. Telling the Truth. To restore a commonplace of truth and reality, every recipient of Social Security benefits should be informed of the nature and source of his benefits. Every benefit check should carry a stub that reveals the dollar amount contributed to the system including the accrued interest and the cumulative amount of benefits received. 2. When total benefits received equal the contributions made the recipient may apply for Social Security assistance and submit to a means test. At that time many Americans being ashamed of applying for public assistance undoubtedly would hasten to leave the system...
7-14-04 -- REVOLUTIONARY Social Security Reform Legislation Introduced July ...
U.S. Newswire (press release) - Washington,DC,USA On July 14, the Social Security Personal Savings and Prosperity Act of 2004 will be introduced by lead sponsors Representative Paul Ryan in the House and ...

PART II of this Swiss America Special Report examines three proposed government solutions and six proposed private sector solutions, including our own. Register today and a free copy of the complete 20-page Special Report will be send right out ...
Free of charge!

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