Social Security: How Can It Be Fixed If Nobody Understands It?

Article excerpt

Byline: Tom Valeo Daily Herald Staff Writer

A 1994 poll revealed that young adults are more likely to believe in UFOs than in the survival of the Social Security system.

They are not alone - Americans of all ages are beginning to wonder if those beloved monthly checks from the government will keep coming.

Anyone who does the arithmetic will quickly discover the problem. The 77 million baby boomers - those born between 1946 and 1964 - constitute the largest single generation in the history of the United States. They make up 29 percent of the population, and thanks to medical advances, they will probably become the largest generation of elderly in the history of the human race. When they retire, they will place an enormous burden on the Social Security system - a burden never even imagined by Franklin D. Roosevelt when he pushed the plan through Congress in 1935.

That's why members of Generation X believe they are more likely to receive a visit from aliens before they receive a Social Security check.

But baby boomers are skeptical, too. John Kovach, 42, is an assistant professor of accounting at the College of DuPage. He has looked at the numbers and drawn the obvious conclusion about the future of Social Security:

"We're not going to have the money," he said. And he doesn't see any easy solution. "If we withdraw benefits, the retirees will go nuts, and if we raise the rates, the workers will go nuts."

So the Social Security system must change - no one who understands the problem disagrees with that.

What makes change so difficult, however, is that so many Americans don't understand how Social Security works.

The widespread notion, fostered by the Social Security Administration itself, is that workers contribute a portion of each paycheck to a massive trust fund where the money is invested wisely and allowed to accumulate interest and dividends. Then, when workers turn 65, they start to tap their accounts, drawing a monthly pension from their own contributions. This is why so many workers feel fully justified when they proclaim, "I'm entitled to Social Security - I'm only getting my own money back!"

The problem is, none of this is true.

Social Security is not an investment program - it is a "pay-as-you-go" plan in which the money deducted from your paycheck this month will turn up in someone's Social Security check next month.

It's true that workers today contribute more each year in payroll taxes than the Social Security Administration pays out, but the extra money - about $65 billion per year - goes right into the general fund where it's used to fix roads, pay park rangers, provide welfare benefits and do all the other things that the federal government does with our tax money.

The federal government, by the way, counts this surplus as revenue, which makes the deficit look smaller than it really is. The government, however, is merely borrowing the Social Security surplus, and promising to repay it someday, with interest, of course.

The typical taxpayer

The federal government already owes the Social Security system more than $515 billion, and will almost certainly have to borrow the money to pay future retirees. Such massive borrowing will soak up much of the money available to banks for lending, causing interest rates to rise and the economy to contract. The government could print more money, of course, but that only causes inflation.

So the Social Security "trust fund" is like a credit card that allows the government to postpone the day of reckoning, but at great cost to future taxpayers.

As for the notion that retirees are just getting their own money back, well . …