Laundry list of problems with Social Security
To understand Social Security's challenges, you first must define its problems. In 1950, 16 workers were paying into Social Security for every retiree getting benefits. Today, 3.3 workers are paying for every retiree receiving benefits. The ratio of workers to retirees probably will fall below two before today's young workers retire.
In 2013 the Social Security system could begin to run a deficit. It will begin to spend more on benefits than it brings in through taxes.
The "lock box" or "trust fund" is a misnomer. Our system is a pay-as-you-go system. The money paid into Social Security is not saved and invested for future retirement benefits. Instead, it is immediately used to pay Social Security benefits to retirees. You have no contractual right to benefits.
Short of reform, the options might call for large tax increases or a cut in benefits.
What's referred to a "lock box" assets are comprised of IOUs, not cash. One proposal would be to separate the budget for Social Security and stop Washington from diverting funds away from the trust fund.
Now, in order to redeem the IOUs or bonds in the trust fund, the government must redeem bonds by raising taxes, and this could be onerous for younger workers after 2013.
The Chile model
There are alternative programs around the world. Chile, Australia and Sweden have reformed their retirement systems. Chile has the3 most advanced and oldest reformed plan. More than 90 % of covered workers participate. Workers can contribute to private accounts that grow tax free. The money is taxed when withdrawn. At retirement, workers have three payout options: Buy an annuity; withdraw funds monthly; or a combination of the two.
There is a debate now in the United States about private accounts. They are viewed by some as a way to avoid increasing payroll taxes.
Workers nearing retirement and current recipients of benefits will not be affected. Younger workers are the ones most attracted to private accounts. The participants in a private account do not have to buy common stocks because there are many alternatives such as bonds, balanced mutual funds and other combinations of assets.
A competent adviser could help with the asset allocation. It is important to take a long-range viewpoint of the security markets. For example, the S&P 500 index with dividends reinvested has shown an annual return of mre than 10% from 1926-2004.
With private accounts, workers own their savings and upon death, the funds go into an estate for heirs rather than being forfeited. There is not space to list all alternatives, but based on historical returns of stocks and bonds, private accounts could be a positive for younger workers.
No one would be required to use a private account; only those who elect to do so would participate.
There are arguments against private accounts. The American Association of Retired Persons has come out against private accounts. Its solutions would include increasing the Social Security tax. The current rate is 6.20% for each employee and employer. AARP would also raise the wage cap on taxes from $90,000 to about $140,000. It would also bring into the program the 7 million local and state employees having their current plans outside of Social Security.
The AARP's opposition to private accounts appears a little weak compared with the alternatives available.
More viable way
President Bill Clinton's fiscal 2000 budget explained the trust-fund balances like this: "They do not consist of real economic assets that can be drawn down in the future to fund benefits; instead they are claims on the treasury, that when redeemed will have to be financed by raising taxes, borrowing from the public or reducing benefits or other expenditures."
Allowing American workers to build up assets with part of their payroll taxes could be a positive way of getting Social Security to be more viable in future years.