Social Crisis: Impending Disaster for Social Security and How We Can Fix It

During the early half of the twentieth century President Franklin Roosevelt set in motion events that would create an economic crisis for American Government. Social Security began as a way to ensure all saved for retirement, yet in our modern era it has become a system where the young pay for the expenses of the elderly. As time goes on and the demographic of the nation changes and there is a smaller ratio between the amount of retirees and those who pay social security taxes, the problem of Social Security must be faced. As President George W. Bush said in the 2003 State of the Union "We must make Social Security permanently sound, not leave that task for another day''[1] Ben Bernanke, Chairman of the Federal Reserve said that "[r]eform of our unsustainable entitlement programs should be a priority... the imperative to undertake reform earlier rather than later is great."[2] As an answer to this call for reform there are a great many proposals currently in Congress to combat the issues arising from Social Security, ranging from government funded programs tied in with personal private accounts, to full privatization of the system. In order to understand what changes will be made to the system, be it partial privatization or full, the current Social Security system must be looked at.

The current Social Security system receives funding via the Federal Insurance Contributions Act (FICA). This Act creates a payroll tax that is paid for by both employee and employer equally. There are both retirement and disability benefits for those who are covered by FICA. Though it was not originally intended to be a pay-as-you-go system, it does currently resemble insurance plans which follow such a system. This system is going to end eventually when the expenditures of Social Security can no longer be met by the income through FICA. The nation is becoming older and there are not as many young people to pay for the old as there once was. When the current population reaches retirement age the Social Security system will be used up and new ways of ensuring retirement must be implemented.

Two of the directions being approach are Privatization and Stabilization. Privatization, whether full or partial, will allow each individual worker to make decisions about their Social Security. Whichever investment is decided upon the worker will receive their securities account through annuities. If these annuities do not completely drain the account by the time of the worker's death then the heirs of the workers will receive the benefits. These Private Retirement Accounts (PRAs) will act like 401(k) savings plans.

The dangers of this sort of investing is apart of the benefit. Investing retirement plans into the stock market will give a boost to the economy by providing corporations with needed capital, but at the same time retirees will not have fully secure PRAs. Should the stock market take a turn for the worse as it did in the early 2000s the PRAs will be severely damaged. This makes full privatization a dangerous concept at the least.

Partial privatization protects against such an outcome. Three separate plans for partial privatization have been made up by the Commission to Strengthen Social Security (CSSS). In the first plan two percent of taxable wages would go from FICA to PRA accounts. In the second plan it would be four percent. The third plan would involve 2.5 percent being set aside from FICA and one percent of wages following suit. While this sort of compromise between the current system and full privatization may seem perfect, there are still many pitfalls, including the issue of bureaucracy and management costs. Stabilization is the option which doesn't bring these new problems to bare.

Advocates of stabilization believe that privatization does not solve the problems faced by Social Security. The risk inherit to privatization does not bring about any great boon to the worker whose retirement might be taken away by Wall Street. Furthermore, it is argued that Privatization will not change the coming choice between raising taxes or cutting benefits involving social security. Fixing social security will not make a difference because of the other programs in existence which are bleeding out funds. The only real answer to the Social Security problem given by stabilization is raising the retirement age and increasing the FICA tax. Instead of finding a new system which might work better, Stabilization adjusts the current system until it can survive a bit longer.

In "The Coming Generational Storm", Laurence J. Kotlikoff and Scott Burns examine the issue of the changing demographic of America. Of the warnings concerning the issues arising with an older nation, the most striking are those involving rising taxes and lower retirement ages. Their solution is not simply stabilizing the already dying Social Security system, but instead changing the system to fit the coming demographic. That is what must be done.

Small adjustments involving age and tax increases will not lessen the burden which will be felt by the younger generations, but will increase their financial troubles while not letting them share the benefits the previous generation received. Like a math formula, the stabilization idea seems to be focused entirely on changing the variables until a target number is reached. The Privatization programs, full or partial, both change that formula. What the income and the expenditures of the government are would no longer matter, but what decisions an individual makes with their PRA would determine their financial health after retirement.

Other issues with stabilization are the assumptions it makes. While it holds an optimistic view of Social Securities current problems, it does not prepare for the possibility of failure. Changing tax rates would only put a hold date on the execution of the now failing system and raising the age limit for retirement would benefit only the generation already covered by Social Security.

Social Security is a failing system that will receive a death blow from the coming demographic shift. The only way this issue can be approached is through a shift in Social Security policy. While small changes, such as those found in stabilization, will prevent the system from too early of a collapse, it will not be a permanent solution. Social Security will still end in the twenty-first century if larger changes are not brought to it. Privatization, preferably full, will bring about the needed changes in a manner that will alter the dynamic permanently. While there are some risks that go along with placing retirement funds into different investments, these risks are worth the saving of the nation's retirement fund.

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http://www.breitbart.com/article.php?id=D8KHUEE00&show_article=1. Retrieved on April 15^th, 2007.

STATE OF THE UNION / Bush honors Iraq sacrifices, vows Social Security overhaul / ANALYSIS: President skirts talk of benefit cuts, tax increases. http://sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2005/02/03/MNG6UB51PB1.DTL. Retrieved on April 15th, 2007.

[1]STATE OF THE UNION / Bush honors Iraq sacrifices, vows Social Security overhaul / ANALYSIS: President skirts talk of benefit cuts, tax increases. Retrieved on April 15th, 2007. http://sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2005/02/03/MNG6UB51PB1.DTL

[2] http://www.breitbart.com/article.php?id=D8KHUEE00&show_article=1. Retrieved on April 15^th, 2007.