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| The Basics | The truth about Social Security is ugly
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Arguing over Band-Aids like delayed retirement or increased immigration completely misses the point: Disaster is looming, and only real fixes are drastic and painful.
By Liz Pulliam Weston
What strikes me most about the arguments over Social Security is how many people just dont get it.
They might understand, in a general way, that the system is in trouble. They might even know that its supposed to run out of money someday. What they dont get is how seriously out of whack our national retirement system has become or how painful the solutions will have to be. Should someone suggest a fix that might remotely affect them, they howl bloody murder -- as if any of us working folk will be able to emerge from this financial debacle unscarred.
So I want to thank economist Laurence J. Kotlikoff and fellow personal finance columnist Scott Burns for laying it out so plainly in their new book, The Coming Generational Storm: What You Need to Know About Americas Economic Future.
Heres the abbreviated version:
- Theres a $45-trillion gap, in present value terms, between the future money the government is expected to take in and what its promised to pay out, with Social Security and Medicare accounting for virtually all of the shortfall. Thats according to economists Kent Smetters and Jagadeesh Gokhale, who studied the issue for the U.S. Treasury Department. (You can read testimony Smetters gave to Congress on the topic here.)
- To put this mind-numbing figure in perspective, the Federal Reserve estimates the total net worth of every person in the U.S. to be around $40 trillion. Our massive U.S. national debt is about $7 trillion.
- Net tax rates would have to double to pay for all the benefits promised, Kotlikoff and Burns say. If you think you pay too much now, think about handing over twice as much.
- Just dealing with the Social Security deficit would require a 4.5 percentage point increase in payroll taxes, the authors say. Such an increase would take the combined Social Security tax to nearly 17%. (Currently Social Security takes 6.2% of workers checks while employers contribute another 6.2%, for a total of 12.4%.)
- All these calculations were made before Congress passed the prescription drug benefit for Medicare. Thats expected to add another $6 trillion to the gap.
- Waiting to fix the system just makes matters worse. The gap could grow to more than $76 trillion if lawmakers delay reforms another 15 years.
Our kids world: higher taxes, inflation, instability
In other words, each year that we stall, we put a bigger burden on the back of todays children. The world theyll face, as painted in grisly detail by the authors, features much higher tax rates, stunning deficits, massive inflation and political instability, among other ills. The current transfer of wealth from the young to the old -- and, in some cases, from the poor to the prosperous, as I wrote about in How Social Security cheats you to pay the rich -- could reach astounding proportions.
The core of the problem is demographics. Fifty years ago, there were 16 workers to support every person receiving a Social Security check. By 2030, there will only be two.
There arent any easy fixes; Kotlikoff and Burns argue persuasively that most of the ones routinely offered -- delayed retirement, increases in productivity due to technology or more immigration -- wont come anywhere close to realistically solving the problem. (Relying on immigrants to maintain the ratio of workers to beneficiaries, for example, would require an influx of 4 million to 6.5 million immigrants a year, the authors say. That compares with the 825,000 legal immigrants and 400,000 or so illegal ones we get annually now.)
The authors solution is to back away from Social Securitys founding premise as a safety net for the elderly. Instead, they want to convert the system into a kind of restricted 401(k), with:
Individual accounts. Workers would get their own accounts, but their mandatory contributions would be invested in a massive global index fund of stocks, bonds and real estate. There would be none of the day trading that some proponents of privatized accounts dream about. The transaction costs of allowing people unfettered access to their money, plus the risk of failure, would be too high, the authors say.
Few guarantees. Your rate of return would depend on market forces and wouldnt be guaranteed. Your principal would be, however. The least youd get back is everything you paid in, and your balance could be bequeathed to heirs if you died prematurely.
Annuitized payouts. If you made it to retirement age, you wouldnt be able to get your benefits in a lump sum. Your account would be converted into an annuity that would pay you a stream of income for the rest of your life. Rather than replacing a certain portion of your working salary, the size of your monthly checks would depend on how much you and your employer contributed, plus how well your investments performed.
We still need a safety net
The authors may be right that this is the most logical, workable solution to the mess were in. Im not quite as ready as they are, though, to ditch that all-important safety net. Its not too hard to imagine scenarios where poor market returns would make for too paltry a benefit to sustain our most vulnerable elderly. Rather than a guarantee of principal, Id like to see some guarantee of subsistence-level income before Id sign off on such a change.
Of course, the odds are depressingly good that nothing significant will be done to reform Social Security anytime soon. Nobody wants to pay more taxes, or suffer benefit cuts, or actually think about what were doing to our kids.
Given the world were setting up for them, twentysomething workers should be marching on Washington right now with pitchforks and torches. The reason they arent is probably because, like most everybody else, they just dont get it.
At least not yet.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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