SOCIAL SECURITY accounts for half the income for 60% of American retirees. In 1995, its trust fund ran a $485,000,000,000 "surplus," but that surplus is borrowed by the Treasury each year, resulting in a huge stack of IOUs which must be paid back, starting around 2010, when the baby boomer generation begins to retire.
Under the Social Security System, the taxes paid by today's workers fund the benefits for current retirees. As long as the labor force grows faster than the number of beneficiaries, the system works. The ratio of workers to recipients is 3.3-to-one. However, when the 77,000,000 people born between 1946 and 1964 begin to retire, it will be crunch time; the ratio is projected to fall to two-to-one within the next 35 years.
America is getting grayer. Today, one in eight Americans is over 65; by 2005, it will be one in five. The 65 and older population is projected to rise from 34,000,000 to 37,000,000 by 2005; 46,000,000 by 2015; 53,000,000 by 2020; and 70,000,000 by 2030. A 65-year-old in 1940 had a life expectancy of another 13 years. Today, it is 16 years for men and 20 for women. Coming medical advances will continue to raise life expectancy.
Benefits, in relation to costs, already have been reduced. A person retiring in 1980 recouped all Social Security taxes paid within three years, including the share paid by the employer. Retirees in 1995 will take an average of 12 years, 15 if they paid the maximum tax. By 2015, the break-even point will average 19 years, 28 for maximum payers.
The above break-even point is based upon current rates, which will not hold. Retirement age is set to reach 67 in 2015 and can be expected to be raised to 69 or 70. The wage base surely will be increased each year. In 1996, it is $62,700, up from $61,200 in 1995 and $60,600 in 1994. Expect the wage rate to increase as well, in addition to a scaling back on annual cost of living adjustments. According to Gary and Aldona Robbins of the Institute for Policy Innovation, "Eliminating the Social Security and Medicare deficits through payroll tax increases would require a doubling of the current 15.3% payroll tax in the next 35 years." Moreover, "Covering the deficits through increases in personal income taxes would require an across the board 75% increase by 2030."
What can be done? Senators Bob Kerry (D.-Neb.) and Alan Simpson (R.-Wyo.) have introduced a comprehensive Social Security reform package that would allow workers to divert payroll taxes to their own retirement accounts, adjust the Consumer Price Index, cut Social Security cost of living increases, and implement other retirement system changes. According to Kerry, the plan would "help the United States avert a fiscal catastrophe and revolutionize our economy and the way we plan for retirement by placing a new, and overdue, emphasis on national savings."
Under the Personal Investment Plan Act, workers would have the option of diverting an amount representing two percent of their Old Age Survivors and Disability Insurance payroll taxes to their personal investment plan, the assets of which could be placed in one or two investment categories. …