Is Social Security in trouble? That appears to be the main point of contention of those who are opposed to any reform of Social Security. They basically claim that the President is exaggerating the problem in order to ram his policy through Congress. I just don't see how anyone can disagree with the facts.
Social Security is financed on a pay-as-you-go system. Unlike an IRA or a 401k, when the money is withheld from a paycheck for Social Security it does not go into an account with your name on it. Instead, that money is used immediately to pay those retirees who are currently drawing Social Security. Presently, Social Security brings in more money in payroll taxes than it pays out in benefits. That excess money, though, is not actually placed in a "lock-box" or in a savings account or anything. Congress, basically, spends the excess money on other Government programs and just sends an IOU over the Social Security Administration.
No one disputes the fact that in 2018 the Social Security Trust Fund will take in less in taxes than it pays out in benefits. At that time, in order to meet its commitments to retirees, it will call Congress and say, "Hey, I'm turning is some of these IOUs for some cash." Congress, then, has to make some hard decisions. It is currently using Social Security money to fund programs. That money will not be available for those programs. On top of that, the Social Security will be requesting the money they loaned back. Congress will have to drastically cut spending and/or raise income taxes in order to continue funding those programs that it is currently borrowing money to fund AND to repay the loan that is due.
Estimates vary, but, most people do agree that on or around 2042, the trust fund will have turned it all of its IOUs and will have to be able to pay retirees based only on the Payroll taxes that it is able to bring in. Many estimate that income is only going to be able to cover 70 percent of the benefits it has promised to pay.
There are quite a number of plausible scenarios that would save Social Security. Congress can raise payroll taxes, borrow the money and go even more deeply into debt, or slash the benefits paid to retirees. This last option actually paints the best picture of what is wrong with Social Security. There is no guarantee that government will keep its end of the contract. Social Security was originally designed as a welfare system, not as an insurance or savings program. Individuals may be granted legal rights to benefits, but have no contractual right to any funds contributed to the system. Since Congress makes the laws, they can change any legal rights at any time. I certainly wouldn't call relying on future politicians not to change laws security.
Besides not being guaranteed, there is another huge problem with Social Security, the financial impact it has on currentt workers. From 1935 until 1949, a worker only paid 2% on the first $3,000 of his income into Social Security. That is, no one paid more than $60 a year in payroll taxes. Now days, Social Security steals 12.4% of the first $90,000 earned, or one-eighth of every paycheck. 80% of Americans pay more in Social Security taxes than they do in income taxes. It is not surprising, then, why I am against the system: it provides no security for my retirement, while impoverishing me in the present. In exchange for an eighth of my earnings today, it guarantees nothing but higher taxes tomorrow.
Now, opponents to reform think that this is just fine. Why fix today what will not really be broken for many years? Almost everyone that I know who is my age is not relying or even figuring Social Security in their retirement plans. However, trying to place 10-15% of our incomes into IRAs and 401ks is very difficult when 12.4% is already being skimmed off the top for retirement. I know of very few people who can afford to live today on one 75% of their checks.
Thats one of the things that make personal retirement accounts so attractive. I can use a little bit of the money that Congress is taking by force from my paycheck to invest in a retirement account that is mine. There will be a contractual obligation in place that ensures that which I pay in and put into an account can only be used for me and whomever I leave it to when I die. That is ownership. That is liberty. That is freedom.
I think it is important to note that the idea of personal retirement accounts is not new. In January 1935, President Franklin D. Roosevelt spoke to Congress, unveiling his proposal for what we today know of as Social Security. One of attributes that he believed ought to have been included in the plan was "voluntary contributory annuities by which individual initiative can increase the annual amounts received in old age." Enacting personal retirement accounts would only be implementing Roosevelt's own ideas.
While I would rather see Social Security completely dismantled, the idea of personal retirement accounts is a good step in the right direction. Maybe we can even model Chile's Mandatory Savings program. While the program forces people to pay in (which is still anti-libertarian to me), it has been very successful. Whatever the solution, something has to be done and be done quickly to prevent the problem from being a problem.
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