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You may not realize it, but America has been living paycheck-to-paycheck. Our largest government program, Social Security, is a “pay-as-you-go” retirement plan where current workers’ taxes pay the benefits for current retirees. This arrangement is sustainable, as long as there are ever more workers than retirees. But what happens if there aren’t enough workers to pay the Social Security bill?
We will soon find out. The baby-boomer generation is a huge demographic bubble—fully 77 million Americans were born between 1946 and 1964, and they will begin to retire over the next two decades. Unfortunately, the average 50-year-old in America has less than $40,000 in personal financial wealth.
That’s simply not enough to ensure an adequate standard of living throughout retirement, which will be longer than ever as medical advances thankfully extend average life expectancies. As a result, many of these workers will be dependent on the government for their retirement security.
Unfortunately, the Social Security program, as it is currently constructed, will not withstand the weight of the baby boomers. The program will become a victim of these demographics as there will be fewer young workers to support ballooning ranks of Social Security retirees. The great flaw in the system—“pay-as-you-go”-- will put the Social Security Program into the red in the year 2015 and bring it to collapse in 2037.
Without reform, Social Security is clearly headed for bankruptcy and crisis. In 15 or 20 years, America will face a stark choice: reduce benefits or dramatically increase taxes on working families. According to Senate Banking Committee estimates, if we don’t reform Social Security the average payroll tax will increase almost 40 percent by the year 2037.
There is another option: transition the program from “pay-as-you-go” to individually owned retirement accounts. If workers paid their Social Security taxes into their own dedicated retirement accounts, demographics become irrelevant as each worker would build their own retirement nest egg. Even better, these resources can be invested into the economy, giving workers a superior return over traditional Social Security.
Why haven’t our politicians made these common-sense reforms? Social Security is often called the “Third Rail” of American politics, meaning that any politician who touches it will get shocked. It is easy for supporters of the status quo to demagogue the issue by frightening senior citizens who currently depend on Social Security. That’s why it is important to remember that no reform proposals would reduce benefits for current recipients.
But, along with protecting Social Security for today’s seniors, we need to save Social Security for future generations. It’s a huge problem and we can’t solve it overnight. That’s why, despite the efforts of some to falsely scare senior citizens, we need to address the Social Security crisis today to set the program on the road to worker-owned Social Security retirement accounts.
Fortunately, despite a recession and political risk in states with lots of retirees like Florida and Arizona, President Bush has bravely joined the battle (see my Dec. 2001 piece The Battle is Joined ) There are a number of legislative ideas to get the ball moving. (Senator Phil Gramm’s proposal
, the White House principles , Cato Institute’s proposal) The best proposals all share the same elements:
We need your help to build the political will for Social Security reform. Take a moment and thank these elected officials for their efforts to reform Social Security now, and contact your own senators and representatives to encourage them to support reforms that give individual workers their own Social Security retirement accounts. It’s not going to be easy to win against Social Security scare tactics, so we need citizens like you to speak up and help make good policy good politics!