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Today’s young workers face a developing crisis that will not only affect them, but also their children. The crisis? Their lack of control over their retirement future.
It is widely believed that as the baby boomer generation begins to retire, the stress placed on the Social Security system will result in a crisis for the government-run retirement program. Under the current system, many younger workers are faced with the prospect of getting less out of the system than they have contributed. On average, workers who recently entered the workforce can expect to receive about a 1 percent return on their Social Security contributions.
The report recently released by the President’s Commission to Strengthen Social Security clearly illustrates the problem at hand – that the Social Security system is in a state of disrepair and faces a true crisis. Though it has provided a stable and reliable retirement to retirees for over 35 years, Social Security as it stands will not be able to accommodate our nation’s demographic changes and provide for coming generations of retirees.
Central to the report’s findings is the shrinking worker-to-beneficiary ratio. Social Security is a "pay-as-you-go," or income transfer system, which means that contrary to popular perception, there is no real "trust fund" where Social Security tax dollars sit and accumulate for an individual’s retirement. Rather, the money put into the system by today’s workers is immediately sent to today’s retirees in the form of benefits. Therefore, retirees are therefore fully dependent on workers to earn and pay taxes if they are to receive their benefits. The worker-to-beneficiary ratio serves as an indicator of the ability of the workforce to pay the benefits of retirees. In 1960, there were more than five workers paying Social Security taxes to support a single retiree. However, this ratio is steadily declining and in less than 30 years, taxes from just two workers will have to support each retiree. As a result, Social Security will begin running a deficit in the year 2016. In 2038, the system will be completely bankrupt and unable to pay benefits.
The report justly concludes that Social Security desperately requires modernization. However, Americans should have been calling for this reform many years ago. The inevitable collapse of the system is a symptom of the flaws inherent in an unfunded program entrusted with the burden of providing retirement security to millions of retirees. Most notable among its flaws is the unfortunate fact that Social Security was created with a general disregard for the American values of ownership and private property.
For example, the biggest public misconception about Social Security is perhaps the belief that individuals are entitled to the money they have paid into the system as workers. As the Social Security Administration explains on their web site, "Entitlement to Social Security benefits is not a contractual right." This principle, established by the Supreme Court in the 1960 case of Flemming v. Nestor, means that Congress can do whatever it wants with an individual’s FICA contributions – even withhold benefits completely. Or as the Social Security Administration states: "Benefits which are granted at one time may be withdrawn." As the popular saying goes, "possession is nine-tenths of the law." In the case of your Social Security benefits, Americans have neither possession nor ownership – only the federal government does.
Without personal ownership, the system is riddled with inequities. African Americans, for example, have a shorter life expectancy than other Americans do. Many pass away before collecting a single benefit check from Social Security, even though they may have contributed tens of thousands of dollars into the system over the course of their working lives. If these same individuals owned personal retirement accounts, their savings could be passed along to a family member. In the current system, their families could be left without even one penny of the deceased’s Social Security tax contributions.
If Social Security is to be successfully modernized – and as the Commission’s report indicates, it must – it is essential that the American principles of ownership and private property be applied. In other words, individuals should be able to control and manage their retirement savings in a personal account that they, not the federal government, own. Doing so would empower retirees with greater freedom, more prosperity, and a legitimate stake in our nation’s economy.