Most of us can probably remember the Saturday Night Live parody of the 2000 presidential debates in which a mock Al Gore was asked to sum up his campaign in one word, to which he responded “lockbox.” Most of us can also remember the debates themselves, in which Gore and George W. Bush spent a substantial amount of time disagreeing with one another over potential reforms to Social Security. While the issue has since moved out of media focus, the impending future of a bankrupt Social Security program still exists. Social Security is a pay-as-you-go type program, so the money being collected now is used to fund people currently retired. As of today, the amount of money collected is greater than the amount of money paid out, so Social Security is said to be running a surplus. The surplus money is invested in bonds issued by the federal government, creating a paper trail in which the government in effect owes money to itself. If nothing is done to reform Social Security, the surplus, also known as the “trust fund,” will not be around much longer.
An impending crisis The Social Security Administration predicts that in 2018, the total amount of benefits paid out will be larger than the taxes taken in; the entire trust fund is predicted to expire in 2042. At this point, the administration will not have enough money to pay out the benefits it has promised. These financial problems are the result of two main causes: increasing life longevity and changing demographics. In 1940, soon after Social Security began, the life expectancy of a 65-year-old was 77.5 years. It has now increased to 83.5 years. With people retiring earlier and living longer, they spend more time receiving Social Security benefits and less time earning taxable income. Additionally, the demographics of the United States are changing. Not only are people living longer, but the post-World War II baby boom generation is getting close to retirement. With the baby boom generation’s retirement, the population of elderly as a percentage of the U.S. population is expected to increase from 13 percent to 20 percent. To support these retirees without bankrupting the system, several options have been proposed. However, the most obvious options, either raising taxes or cutting benefits, have both been met with low public approval, and politicians have become hesitant to push for either. Instead, more creative solutions are being offered.
Privatizing the system Michael Darby, the Warren C. Cordner professor of money and financial markets at the UCLA Anderson School of Management, supports a popular reform known to many as privatization. Under his approach, the money each person contributes would be invested in an individual retirement account (IRA) where it would likely earn a higher return than it does currently with government bonds. “Three percent is not very attractive when compared to an IRA,” Darby said. Darby also noted the approach could be beneficial to college students because they will be the ones paying an additional tax if one is imposed. Also, they will feel the effects of reduced government spending in other areas if Social Security must borrow from the general fund to pay the benefits it promises. “College students are the youngest so they have the most to lose from the current system,” he said. Robert Harding, an economics professor, noted that while he thinks such a program would be beneficial, the change from the current income transfer program to a pension plan would have to be made gradually over a period of 50 or so years. In the meantime, he said he does not think there will be any way to continue Social Security without either raising taxes or cutting benefits or both. “There’s no way to get out of the system without hurting someone,” Harding said. Critics of privatization say it is risky because return on IRAs is not guaranteed the way it is with bonds. Also, the issue of whether the money would be invested in the name of the individual or the government has not been determined. If the money is invested in the name of the government, some obvious problems could arise in terms of government control of private companies and stockholder’s voting. Additionally, as Darby noted, Social Security distributes income by giving lower wage-earners a disproportionately high return, whereas higher-wage earners receive a negative return. If the money for each individual is set into an IRA only accessible at retirement, there would be a need to supplement the IRAs for low-income individuals to bring them up to a social minimum.
Other potential solutions Since politicians are hesitant to cut benefits or to raise taxes, many people think smaller, less controversial approaches have more of a chance of being passed. Many of these approaches focus on increasing the labor force or increasing other forms of retirement plans. Michael Bazdarich, a senior economist with the Anderson Forecast, suggested tax reforms that encourage higher savings and labor-force participation, including removing a “bias against savings” in the current income tax system. “Saved income is taxed when you earn it and taxed again and again when the savings yield returns down the road. However, consumed income is taxed only once -- when you earn it,” he said. Currently, the tax system allows only a limited amount of single-taxation savings plans. Bazdarich said it would be worthwhile ending the double-taxation on retirement plans by removing these limits. Like all other solutions, a problem could arise from this approach. Harding said that while he thinks it is a good idea, it would be problematic for the elderly generation and other people who do not have the money to invest in IRAs. In order to increase the labor force, Bazdarich noted that an ease on immigration laws would be beneficial. Another possible method to help lower the number of retirees relative to the number of workers would be to cut taxes for individuals working past retirement age. “Workers over 65 pay income taxes on their earnings, and they also suffer reduced eligibility for Social Security benefits, so this is a form of double-taxation which discourages older people from working and so exacerbates problems in the nation’s retirement system,” Bazdarich said. Whatever approach the government decides to take to reform Social Security, the sooner it is enacted, the better. Legislators know this, but few have dared to push for reforms. “Any potential change can be portrayed as hurting someone, whether it’s true or not,” Darby said. “No one has reason to take on the system until the public forces the issue. It has been tried, and the political lessons have been learned,” he added.