When presidential contender Al Gore says we must "honor our commitment to the future" and "guarantee Social Security is there when you retire," it appears he is just talking to baby boomers and not Generation Xers and younger Americans. For younger workers, Gore's reform plans just don't deliver.
Social Security has become one of the defining issues in the 2000 election. As well it should be – tough times are ahead for the 65-year-old retirement program.
Social Security is funded each year by a payroll tax on workers. Unfortunately, the number of workers paying taxes to support the system will continue to fall relative to the number of retirees withdrawing benefits – due to retiring baby boomers, longer life expectancies and declining birthrates.
Between now and 2039, the number of retirees will nearly double – forcing Social Security's costs to soar. At the same time, the number of workers will only increase by 18 percent. The ratio of workers to retirees will fall from 3.4 today to 2.1 by 2030 – placing a greater burden on each individual worker.
Social Security's own managers say that by 2039, unless substantive changes are made, payroll taxes will not produce enough money to fund the system – benefits will have to be cut by a third or taxes raised by one-half. Reforms that truly "save" Social Security must address these demographic imbalances.
Al Gore's Social Security reform plan extends the life of the current system by using the entire Social Security surplus to pay off the national debt. The money saved on future debt-service payments are credited back to the Social Security trust fund and extend the life of the current system from 2039 to 2050.
However, the demographic imbalances that threaten the system today will still be present in 2051 after Gore's plan has run its course. Under the Gore plan, no changes are made to offset the program's long-term deficits, and retirees collecting benefits will still depend on younger generations shouldering an ever-greater tax burden to support them.
Taxes on yet-to-be-born workers will still have to be raised and retirement benefits for Generation Xers and younger generations will still have to be cut to bring the system into balance. As tax burdens rise and benefits fall, the current Social Security system will prove to be a worse and worse deal for younger workers. That is no way to "honor our commitment to the future."
Gore's opponent, Texas Gov. George W. Bush, proposes the incorporation of personal retirement accounts into the current Social Security system – an innovative idea long championed by Members of Congress in both parties as well as a number of public policy think tanks.
Bush still has a lot of questions to answer about his plan, including how much of the Social Security tax workers can invest, how the accounts will be managed and how disbursements will be made. Although the details have yet to be unveiled, the concept of personal retirement accounts is worthy of serious consideration.
Personal retirement accounts give workers the opportunity to invest a portion of their Social Security payroll tax into an interest-earning account. As workers with accounts retire, the money in their accounts will offset all or part of their expected Social Security benefit – and the government actually saves money in the long run.
Most importantly, personal accounts address the demographic imbalances that undermine the current system. Under a system of personal retirement accounts, each generation pays its own way. Retirees no longer rely on future generations for their benefits, and future workers are free from the rising financial burden of the unsustainable current system.
Granted, there is no such thing as a free lunch. Reforming the current Social Security to include personal accounts will require up to $3 trillion. However, shouldering the responsibility and making the investment now – most of which can come out of the projected Social Security surplus – can save Social Security and avoid the current system's $21 trillion long-term deficit. Instead of leaving future generations with our bill, we can leave them a financially secure national retirement system.
Whether you support personal retirement accounts or not, Bush's endorsement of the concept signals his understanding that Social Security needs structural reform to weather the long-term demographic trends that we face. Gore should signal that he, too, recognizes Social Security's long-term problems and admit that his plan doesn't actually "save" Social Security, but simply buys time for future reforms.