Social Security Made Simple

by Matt Moore

Social Security reform has become the number one issue of the final days of the 2000 presidential campaign. With all the talk about lockboxes, trust fund solvency and trillion dollar promises, it is very easy to get bogged down by what is unarguably a complex issue. But it doesn't have to be. When you break it down, Social Security is not really all that complicated.

Social Security is in trouble for one simple reason: America is aging. Social Security is a "pay-as-you-go" system, which means that payroll taxes collected from workers today fund the benefits for today's retirees. We're also promising current workers that when they retire, their benefits will be paid by even younger workers.

The first obligation we can handle, but the second may be a problem. Here's why. People are living longer and are having fewer children, which means the number of retirees is growing faster than the number of workers paying the bills.

Since there is a shrinking supply of workers paying the benefits for a growing pool of retirees, the burden on each worker will significantly increase. Taxes will skyrocket and benefits will plummet to keep the system in balance - making a troubled Social Security system worse. In short, we need a reform that breaks us from the current pay-as-you-go structure.

Texas Gov. George W. Bush has such a plan. He would use the Social Security surplus (payroll tax money collected in addition to what is needed to pay current benefits) to establish personal retirement accounts for every worker, like a 401(k) or an IRA. These accounts would be invested in real assets - most likely broad-based mutual funds. Since the accounts would earn a higher rate of return than the current system, they can provide workers with a retirement benefit equal to or greater than the current system.

Why is this the case? Contrary to what critics of reform say, personal retirement accounts do not come at the expense of Social Security benefits - they are Social Security benefits, or at least part of them. Retired workers who own these personal accounts will receive one check from their account and one from the U.S. Treasury. The Treasury check will be large enough to make certain no one receives less than a minimum benefit - most likely equal to what they are currently promised.

Most importantly, since the money invested in the workers' accounts will earn a higher rate of return than the current system offers, the government's burden will be greatly reduced. Each generation will pay for its own benefits, and Social Security will no longer be hostage to the nation's reproduction rate. To see how this might work, check out Internet sites like the NCPA's

It's even easier to describe Vice President Al Gore's plan to deal with the demographic realities of Social Security - he doesn't have one. Rather, Gore defends Social Security's pay-as-you-go structure and promises never to change it. Instead, Gore would use the entire Social Security surplus to pay down the national debt and would use income tax revenue that would otherwise pay interest on the debt to pay future benefits. If all goes according to plan, the current system could be extended until today's 13-year olds retire.

Sounds great, right? Wrong - because Gore's plan does not alter the pay-as-you-go structure, Social Security will still be unprepared to face America's demographic trends. In 2055, when the Gore plan runs its course, people will still be living longer and will still be having fewer children. Taxes will still have to be raised and benefits will still have to be cut.

Furthermore, even though the Gore plan pays down the debt by 2012, the government will have to start borrowing again by 2022 and we will have the same debt we have today by 2029.

According to a recent study by Dr. Tom Saving, the newest Social Security Trustee, in order to meet our obligations under the Gore plan, the payroll tax will have to rise to 19.6 percent by 2050 and 21.3 percent by 2070 - almost twice the tax rate needed under the Bush plan! Otherwise, by 2050, the Gore plan will have four times as much debt as under the Bush plan, and by 2070, the Gore plan will generate up to 35 times as much debt.

Its no wonder that Gore is trying to distract people by attacking Bush's Social Security reform plan. Gore doesn't want voters to realize that his own plan ignores the demographic problems that place the retirement security of future generations in jeopardy.

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