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Joseph Huff-Hannon
Most significantly, the baby boomer generation is graying, and is expected to contribute to a retirement payment bulge, which has already begun, but will peak around the year 2018. This means that the Social Security fund will have to begin paying out a progressively larger sum in benefits than it has had to do thus far. The current surplus will no longer be available for the Federal Government to, hide in a Maryland office filing cabinet.
Cause for panic? Not just yet. The team of 40 actuaries employed by the Social Security Administration to make cautious projections for the next 75 years predict that payroll taxes alone will cover the costs of benefits in year 2018. And after that -- will baby-boomer-turned Granny be out of monthly cash? Not so fast -- the existing trust fund, the surplus that social security is currently running, is expected to be able to cover the remainder of the costs of benefits until the year 2042. Except, the surplus is only on paper, and the government has replace it with IOUs.
That then, is the "crisis." In forty years, the payroll taxes will fall short of supplying the necessary funds, and surplus enjoyed for so many years is, in reality, gone. So if absolutely nothing is done to change Social Security, and all of the demographic projections turn out to be accurate, retirees after 2042 will only receive 70 percent of the benefits they do in 2005, which drops an average monthly payout from $1,500 down to $1,080. It does not drop to zero.
No one would disagree that the definition of a bad investment is one that returns less, which of course, is what the Social Security crisis salesmen say. The problem is -- the system as presently constituted will be unable to fulfill its obligations in less than four decades. Recent polls suggest that the public understanding of this is mixed, but they agree that a solution must be found. But the tenor of concern is not necessarily as shrill as that coming out of the White House. In a poll by NBC News and The Wall Street Journal (1 January 2005) only 14 percent of respondents classified the situation as a crisis, but polls in February show an increase of this crisis perception.
Will what President Bush proposes fix the problem? In other words, can his administration delete the accumulated IOUs from the past four presidents? There are two parts to the plan that the Bush administration is waxing. The first part is to allow today's workers to invest one third of what they pay into Social Security payroll taxes. For a simple example: If you earn $100, your current Social Security contribution is $6.20 (your employer pays the same to equal 12.4 percent,) and the proposed plan would allow you and the employer to invest $4 of that withheld into a private investment account.
At present, the U.S. Treasury bonds were the Social Security surplus is held (as long as no one comes calling for a cash-out) is considered to be the safest -- not the most profitable -- investment in the world. Privatization calls for shifting that chunk away from the Federal government, and into private investment firms on Wall Street. The money would be invested in a mix of stocks and bonds, and the investment firms and banks that administer these accounts would profit through administration fees not part of the deal today. This is the key difference. Although the Feds would presumably regulate such a plan closely, it puts regulations in the hands of politicians -- the same folks who watched the savings and loan scandals of the 1980s and approved IOUs against the Social Security surplus -- decide which firms are eligible to make administration fees for your private accounts. It would appear to be a situation that easily caters to corruption.
Wait! Another headline. President Bush is open to raising the income cap for Social Security taxes, currently at $90,000, as a way to come up with some of the necessary funds for any transition for a program that operates with a surplus. This was a surprising change of view by the president, and seen in part as a response to Federal Reserve Chairman Alan Greenspan's testimony in front of the Senate Banking Committee who said that private accounts by themselves would do nothing to erase a pending $3.7 trillion shortfall expected to accumulate by year 2080. But with a third-less Social Security taxes coming out of your paycheck and falling into the hands of Wall Street investors, don't fewer contributions create a crisis sooner?
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