Modernizing Social Security: Bring This Great Depression Relic into the Age of Investing, or Watch It Collapse

By Brown, Jeffrey; Jenn, Brian et al. | The American Enterprise, July-August 2002 | Go to article overview

Modernizing Social Security: Bring This Great Depression Relic into the Age of Investing, or Watch It Collapse


Brown, Jeffrey, Jenn, Brian, Rounds, Charles E., Jr., Sager, R. H., The American Enterprise


A monumental demographic shift is taking place in the United States: The number of workers per retiree in this country will fall from 3.3 to just 2.1 over the next generation. This puts tremendous pressure on our Social Security system. Within just 15 years, Social Security will start to run cash deficits, and by 2050, the benefits promised under current law would cost nearly 18 percent of the nation's payroll, while revenues would be just over 13 percent. That yawning chasm represents an unsustainable shortfall of several hundreds of billions of dollars a year.

The aging of our population will also wreak havoc in other parts of the federal budget. The portion of the nation's resources eaten up by Medicare (which provides government health coverage to the elderly) will zoom from 2.3 percent of the economy today to 8.5 percent by 2075. Absent dramatic reforms, Medicare and Social Security together will then consume more than 15 percent of the Gross Domestic Product. All personal income taxes currently paid to the federal government amount to only about 9 percent of GDP.

With federal spending on the elderly consuming a skyrocketing proportion of the nation's output, it is imperative that we take action now to lessen the economic burden on future generations. Social Security's finances must be balanced, which will require committing new revenue or slowing the rate of growth of traditional benefits. Younger Americans will have to take greater responsibility for their own golden years--by increasing their personal saving. Higher personal saving will have two benefits: It will stoke individual retirements by fattening the personal wealth older people have accumulated. And it will improve the economy as a whole: More individual saving means more investment. The larger economic pie will make it easier for the nation to pay for the soaring old-age transfers that lie ahead.

Personal saving for retirement can take several forms. Individuals may put away money on their own initiative. This can be encouraged through tax incentives, as with Individual Retirement Accounts (IRAs). Personal saving can also occurr through employer pension plans, which likewise receive favorable treatment under the tax code. Finally, personal saving could take place through a government pension system that allows individuals to steer some of their income into private accounts.

President George W. Bush has proposed to modernize and strengthen Social Security by creating voluntary, individually controlled personal retirement accounts that would augment the existing Social Security safety net. While personal accounts alone will not eliminate Social Security's financial woes, they do offer many advantages over the current system. Under such a system, a worker could direct a portion of his Social Security payroll taxes into an account over which the individual (and spouse) alone would possess legal ownership. The account owner would choose, from a variety of approved options, exactly how his money would be invested. Upon retirement, he could use his accumulated assets to purchase an annuity that would make level payments for the rest of his life, or he could make periodic lump sum withdrawals. In the event of his death, remaining assets would go to his heirs.

And, individuals who choose to invest a portion of their payroll taxes into private accounts can expect higher benefits than are payable under current law. A combined system would therefore provide both the efficiency and safety-net aspects of traditional Social Security, and the advantages of wealth accumulation and personal choice that private investing allows. This combination of benefits does not exist under today's Social Security program.

While the introduction of personal accounts would represent the most significant change in Social Security since the program's inception, the idea itself is not new. …

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