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Old Aug 22nd, 2003, 06:26 PM        Social Security failing; alternative suggested.
Over the Cliff
Social Security is about to plunge, but retirement benefits don't have to.

BY PETE DU PONT
Friday, August 22, 2003 12:01 a.m.

Have you ever fallen off a cliff? If you are younger than 40, you are about to. Social Security is fast approaching a financial precipice that will plunge benefits and smash retirement plans for millions of Americans.
The graph below is a part of the General Accounting Office's July "Social Security Reform" study. Beginning in 2038 Social Security won't be able to pay the benefits promised to retirees without dipping into general federal revenue or borrowing an inordinate sum. Unless more money is found, Social Security checks will drop by 27%.

Actually it's worse: The GAO concludes that in 2018--just 15 years from now--"Social Security's tax income is projected to be insufficient to pay currently scheduled benefits." The system will only be able to continue paying full benefits from then until 2038 if Congress repays the money it has been "borrowing" from FICA taxes for decades. In a decade-and-a-half, Social Security will become a net drain on the federal budget.

Right now FICA taxes take in more than Social Security pays out, so Congress happily spends the "extra money" on a variety of other programs. This revenue stream amounts to about 6.5% of all the money the federal government collects in taxes on income.

But when that reverses in 2018, the Social Security Administration will need all of its FICA taxes plus about 1.5% of income tax revenue, if it is to keep paying benefits. By 2020, paying benefits to the growing army of retiring baby-boomers will eat up 3.4% of income tax revenues. Five years later, 9% and the amounts rapidly rise after that.

Unless something is done, the Social Security Administration will have no choice but to cut benefits. The impact of those reductions will start falling on baby-boomers. People born in 1955 won't see any benefit reductions until they are 83; then they will fall off the cliff. But if you were born in 1970, you fall off the retirement income cliff when you are 68, shortly after retirement. Those born in the 1980s will never receive the benefits retirees get today.

"Absent reform," the GAO concludes, "the nation will ultimately have to choose between persistent, escalating deficits, significant tax increases, and/or dramatic budget cuts of unprecedented magnitude."





So, what to do? Well, we could just let the benefits drop. That would break the pledge made to every American who has paid into the system. It would also be very unfair for all those who paid in expecting to get their money back after they retired. But it would be particularly unfair to younger Americans. Today's seniors would get their full benefits while today's 18 year-olds would get 33% less when they retire.
Or we could commit to pay full benefits whatever the cost. The GAO concludes we could raise FICA taxes this year to 14.3% from the current 12.4%, but as more and more baby boomers retire the tax rate would have to continue to rise, reaching close to 20% the National Center for Policy Analysis estimates.

Shrinking Pensions?
Projected percentage cuts in current Social Security benefits under "trust fund exhaustion scenario"

Source: General Accounting Office. Based on the intermediate assumptions of the 2001 Trustees Report.



Another alternative would be to raise everyone's personal income taxes by about 17% or cut other government spending by about 20% to make room for Social Security.

Or we could keep Social Security benefits the same, FICA taxes the same and just borrow the amount we need each year. That would mean adding $27 trillion to the federal debt, an expensive and irresponsible thing for the government to do.



There is a better way, one that guarantees current benefits to retirees, avoids raising taxes and doesn't burden the government with unsustainable debt. NCPA President John Goodman presented it to President Bush's Social Security Commission two years ago. It's called Personal Savings Accounts.
First, the government would guarantee existing Social Security benefits to everyone who chose to participate in the new PSA system, with no increase in the retirement age.

Second, two percentage points of every participating worker's current payroll tax would be used to fund an individually owned market account. The funds in these PSAs would be invested every year in a balanced portfolio. approximately 70% stocks and 30% bonds. Workers would choose among a variety of investment funds, which would be government certified and required to maintain balanced portfolios.

When they retire, those who paid into PSAs would start receiving two two checks. One would come from their PSA and the second from the government. The second check would be calibrated to ensure everyone received the total benefit amount they would've gotten under the old Social Security system. PSA returns would vary over time depending on market performance, but the government's check would always bring the total amount received up to the guaranteed Social Security benefit.

Finally--and possibly the most important for lifting new generations out of poverty--spouses, children or other dependants would inherit a family member's PSA assets whenever he dies (be it before or after retirement). Under our current Social Security system, workers paying FICA taxes own no assets and their survivors will inherit nothing from the system.

To finance such accounts the government would have to borrow some funds. But the difference between annual government borrowing to pay for Social Security and the funds needed to finance PSAs would be dramatic. Any money borrowed to migrate toward PSAs can be paid back over time--ultimately PSAs will prove less expensive for the government because the longer someone pays into the new system the more their retirement benefits will be paid by market gains. The current system yields Social Security recipients about a 2% return; U.S. Treasury bonds about 3% and over time markets have yielded more than 6%. As more and more annual retirement benefits are paid out of growing Personal Savings Accounts--which would end up covering about two-thirds of retirement costs of someone born today--the government would begin to start running large FICA tax surpluses that would pay off the debt.

This solution would guarantee retirement benefits, which Social Security does not. Accumulated retirement savings in PSA--hundreds of thousands of dollars over a lifetime--would become part of each person's estate (enabling it to be passed to heirs), unlike current Social Security benefits. And the money borrowed to begin the new system would be repaid over 75 years.

Most important, it would avoid pushing millions of younger people off the approaching financial cliff.
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