2008 Woodie Awards
Preventing the Social Security Crisis: Small Changes Won't Cut It
The second in a series on American Ownership Society
Scott Krummey
Issue date: 2/4/05 Section: Commentary
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US Social Security is fast approaching a crisis.
Not a "crisis" like when the Jug bouncer spots your fake ID, a crisis in which the program must soon pay out hundreds of billions more than it receives per year. Specifically, Social Security faces a negative cash flow starting in 2018, and faces a $27 trillion liability over the next 75 years.
This predicament has prompted one of President Bush's key focuses of domestic policy: Social Security reform through the implementation of Personal Retirement Accounts (PRAs). There are major upsides to this idea, so many that this column will not seek to address them yet; the following is merely an outline of the current state of US Social Security and the reason it desperately needs an overhaul.
First, the principle of the current Social Security system is morally flawed. Consider this enjoyable story. A company takes a mandatory cut of its employees' paychecks for some benefits to be received later. Instead of being stored somewhere safe, this money is loaned out to cover other expenses within the company - new equipment, parts, holiday parties, etc. The idea is that when benefits are due to a group of workers, the payments of newer workers will cover these costs. In reality, the money paid to the system is not physically there, thereby risking all of the money of those who faithfully (and involuntarily) paid. If the company in this analogy was a real company, this would be a corporate scandal and a half.
But the company is the US Government, and this is essentially how Social Security operates today: the Social Security Trust Fund is a pile of "special bonds," little more than IOUs promising payment later. Although the premise of helping workers plan for retirement is a valid one, this program no longer meets the demographic and economic conditions in America.
This is where the premise of Social Security crosses from morally questionable to impractical. When Social Security began, there were better than 1 workers for every retiree. In 2004 there were three, and in less than twenty years there will be two. Also, the average number of years spent living in retirement has risen by nearly five years (from 12.6 to 17 years) since the 1930s. Despite this greater burden, benefits are actually increasing: a 2005 retiree can expect about $15,000 per year; by 2030, that figure will be $19,000 (inflation adjusted).
Not a "crisis" like when the Jug bouncer spots your fake ID, a crisis in which the program must soon pay out hundreds of billions more than it receives per year. Specifically, Social Security faces a negative cash flow starting in 2018, and faces a $27 trillion liability over the next 75 years.
This predicament has prompted one of President Bush's key focuses of domestic policy: Social Security reform through the implementation of Personal Retirement Accounts (PRAs). There are major upsides to this idea, so many that this column will not seek to address them yet; the following is merely an outline of the current state of US Social Security and the reason it desperately needs an overhaul.
First, the principle of the current Social Security system is morally flawed. Consider this enjoyable story. A company takes a mandatory cut of its employees' paychecks for some benefits to be received later. Instead of being stored somewhere safe, this money is loaned out to cover other expenses within the company - new equipment, parts, holiday parties, etc. The idea is that when benefits are due to a group of workers, the payments of newer workers will cover these costs. In reality, the money paid to the system is not physically there, thereby risking all of the money of those who faithfully (and involuntarily) paid. If the company in this analogy was a real company, this would be a corporate scandal and a half.
But the company is the US Government, and this is essentially how Social Security operates today: the Social Security Trust Fund is a pile of "special bonds," little more than IOUs promising payment later. Although the premise of helping workers plan for retirement is a valid one, this program no longer meets the demographic and economic conditions in America.
This is where the premise of Social Security crosses from morally questionable to impractical. When Social Security began, there were better than 1 workers for every retiree. In 2004 there were three, and in less than twenty years there will be two. Also, the average number of years spent living in retirement has risen by nearly five years (from 12.6 to 17 years) since the 1930s. Despite this greater burden, benefits are actually increasing: a 2005 retiree can expect about $15,000 per year; by 2030, that figure will be $19,000 (inflation adjusted).