Social Security Reform

Social Security, are you counting on it for your retirement? Maybe it is time to rethink that and then again maybe it is not. Yes massive numbers of baby boomers are getting ready to wade into the pool. Yes the population is living longer. There have been many assumptions used to predict the future of the Social Security system. But are these assumptions right, wrong or half right? Read the article below by Robert Freer and get some different takes on the situation when it comes to our retirement. But no matter what your opinion, keep saving or start today to ensure you will enjoy your retirement in the style you expect.

By Robert E. Freer, Jr., President of The Free Enterprise Foundation

Social Security is long overdue for reform. Younger Americans worry that they will have no assistance from the government when they retire; while older Americans are concerned their benefits will be altered or decreased due to the large number of baby boomers retiring and longer life spans for most Americans. Current predictions indicate benefits will exceed tax revenue coming into the system by 2017 and that unassisted by general tax receipts, Social Security will be unable to pay full benefits by 2041. While President Bush has sought to reassure Americans 55 and older that any changes to the system will be structured to prevent cutbacks for them, he recently conceded it is impossible to tell what might happen to Social Security for those whose life spans may go on for decades.

The president, a good poker player, has offered the outlines of a plan without much detail for individual investment accounts that may help people compensate for any possible benefit reductions in the future. If the President’s proposal is part of the adopted solution, workers would be able to divert nearly two-thirds of the payroll tax from the Social Security trust fund and put it instead into personal accounts. . The President has said that under his plan, a 20-year-old worker who earns an average of $35,000 a year will end up with $250,000 by the time he retires. Workers currently pay 6.2 percent of their taxable wages to finance the retirement system. For them this plan will sound reassuring. Many Americans are skeptical of Social Security, which is far from a true trust fund. The fund, originally designed as a supplemental insurance program for retired workers, has been constantly borrowed against since its inception seventy years ago. Those who don’t like the President’s proposal call it privatization and are wary of changes to what they see as a good system. But the shortsightedness of a few should not prevent the President and Congress from taking responsibility for providing now for future generations.

At the core of all discussion of Social Security’s future lie almost countless assumptions, assumptions for which we can only make reasonable estimates at best. Yes, a record number of “baby boomers” will soon be hitting the system, but who is to say that they will all retire at 65 and if they, nevertheless, begin taking their benefits then, at least they will be continuing to contribute through the FICA portion of withholding . My guess is that the vitality of this generation of retirees will see a record number remain employed in some fashion or other and that many retirees who don’t will be constructive contributors to the non-profit sector instead, alleviating the burden on government to provide these services. This is not enough to save the system in itself but could delay the reckoning day if a record number stay employed as I suspect will occur.

In the short run, if the President’s courage is to be rewarded with success, the current effort ought to be focused only on bringing the system into balance. It appears that the President wishes to not only bring the system into balance but change the relationship between the Social Security System and its beneficiaries. As is occurring elsewhere in society, rather than having a defined benefit plan, future retirees would be encouraged to take responsibility for themselves by opting for what amounts to a “defined contribution” plan for a major portion of their relationship with the system. While ultimately this may be accepted as a good idea, the two trillion dollar price tag for the transition is more than we have political will to invest at this point.

The investment account option should, instead, be considered as part of a long overdue complete overhaul of our tax system. There are a growing number of such sheltered accounts now that don’t impact on Social Security. Doing as the President has suggested is more properly considered as part of Chairman Thomas’ effort in Congress to really reform our bloated, unfair tax code.

Seldom do we have a President with the courage to take on fundamental issues like Social Security. If we don’t reform it now, when will we do it? Surely it will be more costly and divert from other issues of that future day of reckoning. If we don’t do it now, Americans will lose faith in the government’s ability to provide the benefits that all taxpayers have been paying for their entire working lives. If the investment account option is eliminated, the range of options to simply reform the system is definable, and assembling a coalition with the political will to get it done can be managed. The range of solutions most often includes discussion of some combination of later retirement age, a change in the way cost of living is calculated, and a change in the ceiling on FICA withholding,. The latter suggestion has its own set of problems but all should be on the table. This job needs to get done so we can move onto the main course which is tax reform itself.

Copyright © 2007 by Robert E. Freer, Jr. All rights reserved

About the author: Robert E. Freer, Jr. is President of The Free Enterprise Foundation. He is a Visiting Professor, at The Citadel and elected in 2005 to be their first John S. Grinalds Leader in Residence. A regular contributor to the Mercury, He can be reached by E-mail at The Citadel . Copies of his earlier columns can be found The Free Enterprise Foundation.

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