June 30, 2004

June 30, 2004 | Commentary on Social Security

Social Security Reality

This spring, many Americans sat in front of their TV sets, watching a "reality show" in which a well-off, 50-something business tycoon controlled the financial future of 16 young adults. On The Apprentice, Donald Trump weeded through the contestants and ultimately awarded one young man a $200,000 contract.

A somewhat similar situation prevails in the real world. Here in Washington, a group of well-off 50-somethings actually does control the financial future of millions of young people. Unfortunately, the retirement "rewards" Congress offers younger generations of Americans are not nearly so appealing as those proffered by The Donald.

Consider the grim figures presented in the most recent report from the trustees of the Social Security Administration. They note that, in addition to paying 100 percent of their regularly scheduled Social Security taxes, this year's high-school graduates can expect to be paying sharply higher income taxes at about the same time most will be trying to support their own families.

That's because, after 2018, Social Security will start paying out more money in benefits than it takes in in payroll taxes - so the program will have to start cashing in its Treasury bonds to pay full benefits. Those bonds will total $5 trillion. The only way to pay for them will be to raise taxes - right as today's youngsters start hitting their earnings stride.

It gets worse. By 2042, the Social Security trust fund will be completely tapped out, with no bonds left to cash in. Current law bars Social Security benefits from exceeding revenues, so at that point - when this year's college graduates are just entering their 60s - retirement checks would have to be slashed by more than one quarter.

And people complain that Social Security benefits are too low now. Think how future retirees will feel when, after paying full Social Security taxes - plus additional taxes to pay off the $5 trillion shortfall - they lose a quarter of their benefits.

The gray-haired set, certain that the program will provide for them, seems largely content to ignore these facts, sticking us - their progeny - with the ultimate inter-generational booby prize: paying through the nose for their benefits while watching our prospects of collecting similar benefits fade to nothing.

Obviously, the generation that enacted the Social Security system didn't intend to rip off their descendents. But as the baby boomers retire, the system, which transfers wealth from current workers to current retirees, will begin to collapse under its own weight.

Social Security works as long as the number of contributors dwarfs the number of beneficiaries. As late as 1950, there were 16 workers for every one retiree. But life expectancy and other demographic factors have conspired to push the ratio to about three and a half workers for every retiree.

Today's youth must demand that politicians address this looming crisis now. With each passing year, practical solutions become more elusive and more painful. Waiting until our generation holds the reins of power isn't a viable option.

Now don't misunderstand me: I am not advocating a generational war where we beat up little old ladies and take their purses. After all, my grandmother is on Social Security, and my parents will retire soon. I want them to receive everything they've been promised. But keeping our promises to those who have already invested doesn't make the picture in 2042 any rosier.

Absent reform, today's young people will inherit a Social Security system that offers them only two alternatives: sharply higher taxes or sharply lower benefits. But there is a practical, far less painful way out: making today's payroll taxes work harder for tomorrow's retirees.

Personal retirement accounts would give taxpayers the option of divert a portion of their payroll taxes into one of several low-risk mutual funds, which would almost surely earn a much higher rate of return than the current system. The personal account option would be entirely voluntary, but would at least give my generation a chance to build some kind of nest egg for our retirement.

The time to reform Social Security is now. Our generation must shake off its political apathy and demand action on this issue. Otherwise, reality TV in 50 years may feature a bunch of 70-somethings competing for the grand prize offered by Donald Trump III: a check for next month's rent.

Keith Miller, a 2003 graduate of Hillsdale College, is a researcher at the Heritage Foundation.

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First appeared in National Review Online