31 January
by John Vomastic


A Straightforward Solution for Social Security

Many different methods have been proposed to fix Social Security in addition to Bush's private accounts. These include raising the retirement age, increasing payroll taxes or reducing benefits. None of the traditional proposals, including private accounts, directly address the main issue: that a larger and larger number of retirees are being supported by fewer and fewer workers. People are living longer and healthier lives.

In 1940, shortly after Social Security was initiated, the life expectancy was only 64 years. In 2002, it had increased by 13 years to 77. (Data is for Americans of all races, male and female). If the initial retirement age of 65 in 1940 was increased by 13 years, it would be 78 today.

The question that should be addressed by Americans is what percentage of our elderly population are we willing to provide with entitlement programs (i.e., Social Security and Medicare)?

It's unfair to ask younger workers to pay additional payroll taxes to support an ever-increasing percentage of retirees. It's also unfair to ask retirees who have made contributions throughout their working lives to accept reduced benefits.

The issue of longer life spans affects other things in our society besides Social Security. Mandatory retirement ages, such as 60 years for airline pilots, have not been updated to recognize that people are living longer and are in better health.

Social Security is a contract from one generation of Americans to another. Let me repeat that, because it is so important - Social Security is a contract from one generation to another. It states, in unwritten language, that if you contribute part of your hard-earned wages to support an elderly portion of our society, younger workers in the future will do the same for you. The key is to determine the proper percentage of retirees to the number of people of working age.

What is the proper percentage? In 2018, contributions from wage earners will equal payments to retirees and those on disability. At that point, Social Security would be self-sustaining. This would be a good time to set the needed benchmark. In 2018, under current regulations, the age required for full retirement benefits will be 66. The percentage of retirees (age 66 and older) versus total population of working-age adults (ages 20 up to 66) would provide a recommended figure. Using government census data (http://www.census.gov/ipc/www/usinterimproj/), that figure is 24.37%. To keep this percentage relatively constant, the retirement age would have to increase in subsequent years because of the baby boomers. The chart below illustrates this trend.

The maximum age is about 71.6. The retirement age actually begins to decrease after 2044 as the baby boomers begin to die off.

These figures are conservative, because they do deplete the huge reserves in the Social Security Trust Fund (SSTF). Ever since 1983, the SSTF has been accumulating funds, since contributions from wages have exceeded payments to beneficiaries. In 2018, contributions into the SSTF will equal outgoing payments, if interest earned by surpluses in the SSTF is not included. At that time (2018), the funds in the SSTF are estimated to be $5 trillion. If interest on the funds already accumulated in the SSTF is included, the year when funds in the SSTF actually begin to decrease is 2028. At its peak in 2028, the money accumulated in the SSTF is estimated to be $7.5 trillion.

The data in the chart is for a self-sustaining system (money in = money out) and would not draw down funds from the SSTF but actually increase them from 2018 and beyond. If funds could be gradually withdrawn from the SSTF, the hump caused by the baby boomers could be flattened and the retirement age could be reduced from the computed maximum value.

Any adjustments to the retirement age could be accurately projected well in advance, so that persons nearing retirement could still have the choice of retiring early with reduced benefits (like 62 today) or delay retirement with increased benefits (like 70 today).

In surveys of young workers, many respondents felt that Social Security would not be available for them when they are eligible to retire. With the proposed adjustment, they would be assured of the same benefits as previous generations. No changes would be required on how benefits are computed. No increases in payroll taxes would be needed.

With this modification, politicians would never have to meddle in the Social Security System in the future, and that alone would greatly restore confidence in the system. Using the computed percentage as a benchmark, Social Security would remain solvent and secure forever fulfilling the unwritten contract from one generation of Americans to another. Trust in the Social Security system would be restored and maintained. It's a proposal that Congress and the Bush administration should seriously consider.


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