I respect President George W. Bush a lot and I’m glad he’s our president. In general I agree with his policies and priorities. Having said that, I have serious issues with his plan to revamp Social Security.
Under the President’s plan, younger American workers would have the option of placing a portion of their Social Security taxes in a stock market investment account. Those funds would likely produce better yields than the present system. So far, the plan sounds good.
The problem is Social Security is not an investment vehicle. It is an inter-generation social contract between workers and retirees. Workers now employed in the work force pay the benefits of those who have completed their work careers and are now retired. Truly, there is no Social Security trust fund. There is a temporary excess of Social Security collections due to the enormous size of the Baby Boom generation, who are currently paying in the taxes, and the smaller size World War II generation, who are collecting the benefits. When us “Boomers” reach retirement, the situation will reverse since the generation behind us is much smaller than we are.
Already the Social Security account is scheduled to run dry before I get through retirement. Should younger workers begin diverting a portion of their taxes to individual investment accounts, the account will dry up even sooner. There is no way to avoid a Social Security shortfall in the next 20 years or so using current benefits and assumptions.
How did we get in this shape? Well, it all began at the beginning. When President Roosevelt initiated Social Security he chose to cover the existing population of older Americans. Obviously, those workers had not paid in sufficient taxes to fund their retirement. Thus was born the idea that the younger generation would pay for the retirement of the older generation and the system would continue in that way ad infinitum. Everything would be fine if there were no bumps in the road.
Bump number one. The World War II generation came home from the war to enjoy peace and prosperity beyond their wildest dreams. Their younger years were spent in economic depression and the ever-present threat of war. Now they were happy and secure and anxious to build families. And build families they did. They birthed the huge generation of Baby Boomers. During their working years, the “Boomers” have been highly successful economically but have dropped the ball on replenishing the population.
The generation behind the Boomers is much smaller. Therein lies the problem. Fewer workers to pay the huge retirement tab for the soon to be retiring generation. We Boomers will gobble up the existing Social Security funds in short order. If our children are allowed to divert a portion of their Social Security taxes to private investment accounts, the gobbling will happen much sooner.
You may believe that President Roosevelt should never have created this system in the first place. Regardless of what we think about the system, it exists and represents a commitment between younger workers and older workers. Either we will honor that commitment or we won’t.
Bump number two. Politicians have made hay out of constantly increasing Social Security benefits over the years. It has been very popular to run as the friend of older Americans and a number of politicians have made a career from pushing for higher and higher benefits.
Initially, Social Security was to be a safety net to prevent destitution. Unfortunately, it has become an excuse not to save anything toward retirement. The timing could not have been better. Since the rise of advertising-driven consumerism, it has been easy and natural to consume with every penny we have assuming that Social Security will be sufficient for our retirement. An understandable, but poor, choice.
Unless we want to significantly lower our standard of living at retirement, Social Security alone won’t do the job. The commonly touted view that retirement living is cheaper than the cost of living during our working years is baloney. Retirees enjoy doing the same things they did before and possibly taking up a few hobbies they didn’t have time for while they were working.
Anyway you cut it, diverting a portion of Social Security taxes to private investment is a bad idea that will not work under any circumstances. It’s good politics I suppose, however it fails to test of practicality. I hope the fruit soon dies on the vine and we can get on to some relevant, workable strategies for our country.
Thought for the Moment — We can’t always control what happens to us, but we can always control how we react to it.
— actor Robert Urich (1946-2002)
Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. Contact him at firstname.lastname@example.org.