The Social Security Problem
From The Wall Street Journal:
What’s the matter with Social Security?
The fundamental problem is demographic. In 1960, there were five workers for every Social Security beneficiary. Today there are slightly more than three. In 30 years, there will be only two. That means fewer tax-paying workers to support more benefit-receiving retirees.
If tax rates and benefits remain as they are under current law, the system will begin paying out more in benefits than it collects in taxes around 2018, according to Social Security actuaries.
What is the Social Security trust fund?The trust fund is an accounting device, but one with enormous political significance. Franklin D. Roosevelt wanted a program that workers would see not as a welfare program, but as one into which they made contributions and got old-age pensions. “If I have anything to say about it,” he once said, “it will always be contributed, both on the part of the employer and the employee, on a sound actuarial basis. It means no money out of the Treasury.” The creation of a Social Security trust fund in 1939 to serve as a holding pen for worker contributions solidified this notion.
Social Security revenues began to exceed benefits after 1983 when President Reagan and Congress, accepting recommendations by a panel headed up by Alan Greenspan, then a private economist, increased payroll taxes, reduced benefits and began a gradual increase (to age 67) in the age at which workers are eligible for full benefits. This altered Social Security from a pay-as-you-go system into one that partially prefunds benefits. Last year, Social Security collected $151.1 billion more in taxes and interest than it paid out.
The growing Social Security trust fund, now about $1.5 trillion, is invested in interest-paying U.S. Treasury securities, or, essentially, lent to the rest of the government. This sometimes leads to charges that Congress is “spending” Social Security funds. But there isn’t any safer investment.
So how do you fix the problem? Since there will be less workers paying into the program, and more retirees drawing from the funds, you can raise taxes to cover the difference. The committee appointed by President Bush suggests ‘personal accounts’ to give individuals more ownership over their money, without feeling like the government is taken it from them. Here’s how a private account would work:
1: Worker diverts up to 4% of wages into private account, with a $1,000 limit that rises each year.
2: Worker puts money in stock or bond mutual funds.
3: At retirement, government reduces traditional Social Security monthly benefit to reflect taxes diverted to private accounts. Here’s how:
• Add up contributions to private account and what they’d earn if invested at 3% on top of inflation
• Estimate what that total would provide monthly if paid over retiree’s life
• Subtract that sum from monthly government benefit
4: A retiree comes out ahead if personal account earns more than 3% on top of inflation. Retiree is worse off if returns are less than that.
5: Worker can use private account at retirement to spend, save or bequeath.
Note: Mr. Bush proposes additional across-the-board reductions in Social Security benefits from those promised in current law, but hasn’t spelled out details.
Source: White House
“Private accounts are a good idea. Most Americans save too little. Social Security was never intended to be all of anyone’s retirement income: Everyone was supposed to have private pensions and personal savings as well. But private accounts funded by cutting Social Security contributions are a bad idea.” - Brad DeLong, an economist at the University of California at Berkeley.
I like the idea of letting us keep part of what we would have contributed into the social security fund, and invest it in safe, moderated investments. Smart investing in your own personal account could mean you receive more as a social security supplement to your retirement savings. If they decide not to go with personal retirement savings accounts, has the government lost all faith in the American people that they can handle their finances on their own? What do you guys think? Do you think personal accounts are a good idea? How should the government fund them, if not to cut some of the contributions to the current system? What other options are being introduced, and by whom?
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March 5th, 2007 at 6:06 pm
[...] the government. This goes well beyond the micro debates surrounding specific topics like Social Security, but extends to all government entitlement programs, especially those involving health care, like [...]