Social Security's Looming Problems Need Fixing Now

If you're between the ages of 21 and 55, you've made a terrible investment and you continue to do so with every paycheck. I'm talking about Social Security, of course.

Under the current system, you simply can't get the promised benefits at the promised time. Or if you do get the dollars, they'll be worth far less because of inflation. When you realize you're caught in this losing deal, we'll face Generation Warfare.

Wouldn't it be nice if we faced up to this inevitability now, and restructured the system to be fairer to younger workers while still giving current retirees and those nearing retirement the benefits they've been promised?

Here are the possibilities, an assessment of the costs and consequences of various plans to either raise taxes, cut benefits, or add private accounts.

But first, let me acknowledge that there is a slight chance that Social Security won't need fixing. If we have very strong economic growth over the next 20 or 30 years, we might not face a problem in 2042 when the Social Security system is projected to run out of money in its "trust fund." But do you want to bet your or your children's retirement on it?

Tax Hikes, Benefit Cuts

Let's agree that current and near-retiree benefits should not be affected. Then there are some limited choices.

• Raise the retirement age. We're already doing that. Those born after 1959 will get full retirement benefits at age 67-plus.

• Raise current FICA taxes. Currently workers and employers pay a combined 12.4 percent. Actuaries estimate that if we raised the rate to 13.9 percent, the system would be solvent for 75 years.

Problem: Higher tax rates could slow the economy so much that unemployment climbs, payroll taxes dip, and the problem gets worse, not better.

• Expand the wage base. Currently the FICA tax stops at $90,000 of income. That captures 85 percent of all wages. Extending FICA collections to $140,000 of wages would capture 90 percent of wages and, say experts, fill about 40 percent of the projected deficit.

Problem: Again, there's the worry that a bigger tax bite would slow economic growth.

• Reduce the growth of future initial benefits. That's part of the president's proposal: Linking initial payments for future retirees to a more conservative index of consumer prices, instead of the current wage index.

• Deny benefits to wealthy retirees. Social Security could become a "means-tested" benefits program, even though wealthy retirees paid into the system over their lifetime.

Private Accounts

A combination of some of these elements could put Social Security in a more solvent position for younger baby boomers' retirement. But as noted previously, each of these elements has its own potential economic consequences--not to mention the political implications.

The president has proposed that current workers be allowed to voluntarily set aside up to 4 percent of their FICA contributions to be invested in private accounts in conservative mutual funds, in return for accepting lower Social Security benefits at retirement.

The idea of private investments has generated great debate. What if people don't make smart investment decisions? What if you retire when the markets are down? Plus, there's the issue of what happens if young workers stop paying into Social Security and divert their money to private accounts. Without that money, how will current benefits be paid? The gap could be $1 trillion or more.

Looming Medicare Disaster

On the other hand, at least workers would have the potential of a better return than the guaranteed bad deal Social Security currently gives them. And they would have assets to leave to their family. Plus, they'd have an ownership stake in the American economy.

One thing is certain. Even the most ardent supporters of diverting Social Security taxes into private accounts concede doing so won't solve the overall problem of paying future benefits to today's workers. The system itself must be adjusted in one of the ways mentioned above.

Then we can go to work on Medicare, another looming financial disaster.

Hoping and wishing these problems simply will disappear is irresponsible. It's time to face the issues. And that's The Savage Truth.

Chicago Sun-Times columnist Terry Savage (savage@suntimes.com), a registered investment adviser, is on the board of the Chicago Mercantile Exchange. This article was first published by the Chicago Sun-Times on February 17, 2005. Reprinted by permission.