MARCH
2004

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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03-25-04

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The Check in Ida Mae Fuller's Mailbox


Federal Reserve Chairman Alan Greenspan did us a favor in February. He told Congress that the Social Security problem should be solved by cutting future benefits. You don't have to agree with his solution to appreciate his words. We need a debate about Social Security. Congress, special interest groups and political parties are so divided that the problem has been shoved to the back burner.

Don't get the wrong idea. Social Security isn't going bankrupt anytime soon. The latest Social Security Trustees report says the crisis will hit in 38 years, in 2042. By then, the system will have revenue to pay only three-quarters of the promised benefits. Most of Social Security's benefits are paid out of the taxes from people currently working, not from a pension fund accumulated during the retiree's working years. But the number of retired beneficiaries is growing faster than the number of working taxpayers.

The problem started with people like Ida Mae Fuller. Fuller retired in 1939, after a career as a legal secretary in Vermont. In February 1940, she found a check from the Social Security Administration in her mailbox. It was check number 00-000-01 for $22.54. She was the first Social Security beneficiary.

Social Security taxes started in 1937. Fuller paid taxes for two years until her retirement, a total of $24.75 for her entire working life. With her second benefit check she had already received more than she had paid in. She lived to be 100. Her benefits came from the taxpayers who were working during her retirement.

That's not what President Franklin Roosevelt had in mind when he first considered old-age security. Roosevelt wanted a pension, a system that collected contributions during a worker's years of employment, invested them in a trust fund, then paid benefits from the fund after the worker retired. That's what Social Security was when the law was passed in 1935.

But that idea ran into three tough problems, problems that we still face. First, the trust fund would grow to enormous size. How would it be invested? Perhaps in Treasury bonds, but there weren't enough bonds to invest in back then (World War II borrowing solved that problem).

Perhaps the trust fund could be invested in the stock market. But the memory of the 1929 crash was still fresh, and that seemed pretty risky. Besides, investing in stocks meant that the president could control a fund that owned a lot of stock in private businesses. Neither the business people nor Roosevelt liked that idea.

Second, the economy was struggling to recover from the Great Depression. Building a pension fund meant collecting taxes now and paying benefits much later. A tax hike during a depression is a bad idea. There was a recession in 1937-38, partly because Social Security taxes started in 1937, three years before benefits were first paid.

Third, there were millions of retired people in desperate need during the 1930s. They never had the chance to contribute to the Social Security pension fund. How to pay them benefits? 

The answer to all these problems was the same. Don't accumulate a big pension fund. That meant there was no fund to invest, new benefits offset new taxes and currently retired people received benefits. By the time Ida Mae Fuller went to her mailbox, the Social Security law had been amended to eliminate the big pension fund.

We face echoes of these three problems today. People who think Social Security funds should be invested in the stock market want the taxpayers to control their investments. That way, the Social Security administration won't control the fate of private businesses. Stock market risk is still a concern.

Greenspan says benefits should be cut in the future, instead of raising taxes now. He fears that a tax hike would slow economic growth.

The first generation of beneficiaries didn't pay Social Security taxes. If we make Social Security a true pension, current taxpayers will have to contribute to their own pension funds, while still paying to support current beneficiaries.

That's the problem that started in Ida Mae Fuller's mailbox. No generation wants to pay for Social Security twice.

 

 

 

Writer: Larry DeBoer
Editor: Olivia Maddox