Social Security is something you get when you retire, right? Right. It's also something you don't have to worry about until you retire, right? Wrong! The current Social Security fund will be completely depleted at some point in the decade of the 2030s. This poses a huge dilemma, which as of now, remains unsolved. One idea that has been floated by politicians -- some responding with enthusiastic support, others with ridicule and criticism -- is the partial privatization of Social Security. Partial privatization is a viable solution to this problem looming on the horizon and embraces the ideal of personal responsibility while providing a prosperous retirement for our generation.
Many of you might raise the seemingly reasonable question, "Who cares?" However, if you take a closer look at the statistics, in the year 2030 we will be in the "real world." We will hold jobs and pay several different types of taxes, including Social Security, or FICA, taxes. Many of us already pay FICA taxes; they are taken directly out of our paycheck. Thus, we have a stake in this system.
Currently, our parents' generation is paying into the Social Security system. Their monies are going to pay for our grandparents' Social Security funds, which they are currently receiving. In the immediate future, there is no problem. The Baby Boomer generation is able to handle the costs of our grandparents' collective bill.
However, in 2010, around 76 million Baby Boomers will start to retire. It is logical, then, to conclude that our generation (Generations X and Y) will pay our parents' Social Security when they begin to retire. The catch: There are much more of our parents than there are of us, to put it simply. Congressman Chet Edwards, D-Texas,cites the following actuarial projection on his web site, "By 2025, the number of Americans age 65 and older will grow by 75 percent, but the number of workers whose taxes will finance future benefits will only grow by 13 percent."
According to the Social Security Administration (SSA), in 2014, the Social Security benefit payments given to retirees will not be paid to the government in taxes by the working force; there will not be enough money. Our taxes will either have to be raised significantly, or the program will face a cut in benefits, such as Medicare. The Baby Boomer generation will not be supported by Social Security in its current form if it is not modernized to meet the needs of a changing demographic.
I don't mean to bore you with all of these statistics and numbers, but it simply boils down to this: We will have to pay more taxes, and may not see any of our money when we retire! The alternative, privatization, will help to alleviate this problem. If citizens were given the option of taking a part of their FICA taxes and investing them in individual retirement accounts, they will get a higher real annual return on their money, with estimations of approximately a 6.5 percent return, according to independent actuaries of the SSA, as opposed to an average two percent return with the current system, according to a study released by the Cato Institute. The higher return gained from partial privatization will insure that our generation has a sufficient retirement "nest egg."
With the instability of the stock market, some question the option of allowing people to control their own money. However, from the forecast of the current system, action has to be taken to reform it. The proposed privatization plan will also encourage personal responsibility among our generation, with less government interference. If you were given a certain amount of money to set aside for your own retirement, wouldn't you take all the necessary steps to manage it well, knowing that your actions have a direct effect on your standard of living when you retire? When your money is given to an entity that has no familiarity or sense of attachment with you personally (e.g. the government), do you think it will safeguard your money just as well as you would? Statistics show that a good portion of that money won't even be in possession of the government by the time we're thinking about retirement.
Partial privatization has proven to be effective. Employees in three Texas counties opted out of the Social Security program more than a decade ago and are earning an average of 6.5 percent interest, compounded daily, on their personal retirement accounts. They are similar to an annuity, managed by an insurance company chosen by the employees on the basis of the highest rate of return. The National Center for Policy Analysis, in a Brief Analysis,translates this into the following: "A retired $20,000-per-year worker with the personal retirement account would receive $2,740 each month at current interest rates, while Social Security benefits would be about $775 per month." Similarly, a worker who earned $50,000 per year will receive $6,843 as opposed to $1,302. The life insurance benefit amounts to three times the workers' salary (benefit is between $50,000 and $150,000) compared to the measly $255 provided with the current Social Security system. If given the choice, which would you prefer?
In a recent Econ 201 class, University Professor Dr. Elzinga quipped, "You're going to be paying for my retirement; I don't know who's going to be paying for yours. Thanks so much!" Shouldn't we strive to provide a financially secure retirement for our generation?
(Whitney Blake's column appears Fridays in The Cavalier Daily. She can be reached at wblake@cavalierdaily.com)
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