SOCIAL INSECURITY

The insolvency of the social security system writ large during Ronald Reagan’s campaign for President. The insufficiency of the fund became widely known. America was introduced to the “Baby Boomers.” When they retired, it was said, they would swamp the system. After his election success President Reagan acted on December 16, 1981, when he established the National Commission on Social Security Reform to address the serious financial deterioration of the OASI or Old-Age and Survivors Insurance Trust Fund once and for all.

The blue ribbon panel was composed of fifteen members, eight Republicans and seven Democrats. Future Federal Reserve Board chairman, Alan Greenspan, led what came to be known as the Greenspan Commission. The President tasked Mr. Greenspan to: “. . . review relevant analyses of the current and long-term financial condition of the Social Security Trust Funds; identify problems that may threaten the long-term solvency of such funds; analyze potential solutions to such problems that will both assure the financial integrity of the Social Security System and the provision of and provide appropriate recommendations to the Secretary of Health and Human Services, the President, and the Congress.” They met nine times and held no public hearings. In the end Mr. Greenspan recommended an increase in the payroll tax and that the investment procedures of the Trust Funds be revised so that special government certificates would be tendered instead of a book entry record. This resulted in an enormous accumulation of money, and set up a condition now widely regarded as the “Clinton surpluses”.

By the time Mr. Clinton took office, this Trust Fund held over 2 trillion dollars in excess assets. Thanks to unified budgeting, that surplus of funds became extra income in the Clinton Era books. Before 1969, Social Security Trust Funds were not included in the budget process. However in 1974, Congress used a unified budget by formally including these Trust Funds in the annual budget process. Thus if the Trust Fund took in more than it paid out, it had the effect of reducing the overall budget deficit in that fiscal year. Moreover, there had been a very critical public discussion about the investment procedures of the Social Security Trust Funds. The prevailing view, at the time, was that investments had not been made on a proper basis and that reasonable rates of return had not been obtained. Many who examined the situation thought OASI, DI, HI, and SMI Trust Funds should be removed from the unified budget.

Mr. Greenspan didn’t suggest that this should be done. In fact, He merely recommended formalizing the transfer of the trust funds using “special” IOUs. Against this backdrop the Trust Funds built up an enormous reserve which was subsequently absorbed into the budget plans of every succeeding Congress. Fast forward to today, the Social Security Trust Funds have provided a well of cash for which Congress has found a use. Nearly 4 trillion dollars has been borrowed from the funds. Starting in 2010, the money will have to be paid back in order for recipients to receive benefits. So not only will the borrowing pool be gone but the strain on the general fund will mean either higher taxes or greater deficits. In the past, these deficits were partially financed by the excess contributions to these various funds. Where will the money come from now? In 2008, health care spending in the United States reached $2.4 trillion, and is projected to reach $3.1 trillion in 2012. In 2008, the United States spent 17 percent of its gross domestic product (GDP) on health care. It is projected that the percentage will reach 20 percent by 2017.

Many people may not realize that there was no health insurance plan for the masses prior to 1929 when the first modern group health insurance plan began. A Teacher’s Association in Dallas, Texas, contracted with Baylor Hospital for medical services for its members in exchange for a monthly premium. In 1932, Blue Cross and Blue Shield first offered group health plans. Blue Cross and Blue Shield Plans were successful because they arranged discounted fees with hospitals. Employer sponsored benefit plans became the standard in the 1950’s. Disability benefits were included in Social Security coverage for the first time in 1954. When Medicare began in 1965, less than 25% of all of the health care costs were paid by social insurance. 30 years later that number has risen to 50%.

Insuring health costs was really a natural progression from British merchants 300 years ago who each contributed money to a fund intended to compensate owners of lost ships. Following London’s Great Fire in 1666, this concept of insurance crept onto land and the first insurance companies appeared. It was the wage and price controls of the 1940s that brought on employer paid health insurance. Since the gargantuan employers of the day couldn’t raise wages, they paid benefits. In order to afford to cover customer losses, insurance companies needed a very large base of members and the nation’s industrial concerns provided just such a pool. The funds that have accumulated in the nations health insurance companies is staggering. The total admitted assets for the top 25 U.S. health insurers in this country is $3.6 trillion and for the entire industry it is $4.6 trillion, according to A.M. Best. Bear in mind that this accumulation has occurred in the last 30 years or so. This money has been set aside to fund potential claims. It is in excess of the salaries and bonuses of top execs which represents as much as 25% of every premium dollar.

To those in power, this stream has the potential to provide a pool of assets equivalent to the current deficit in the Social Security Trust Funds. Further, by mandating coverage for the 45 million or so uninsured, the proposed “public option” guarantees that the younger uninsured portion of the population pays premiums which will not be used for health care. It is a statistical fact that young people have fewer medical claims, so their insurance premiums will be largely unused for their care. This money will be “invested” to provide for future care. This is the key to understanding the process. This is not about the uninsured. It is not about the millions of people struggling with health care costs. It is about the pool of cash that can be generated by a public option. A $1200 annual tax or premium on the currently uninsured will generate 4 billion dollars a month in revenue. Adding the currently insured to the fold will undoubtedly create an irresistible pile of capital which will be treated with the same care as the Social Security Trust Fund.

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