Modernizing Social Security Now will Reduce Impacts of Reforms
Op-ed written by Congressman Hoekstra and published in the Grand Rapids Press
Washington,
Apr 19, 2005 -
Call it a problem, a challenge or a crisis, but the reality is that Social Security needs to be fixed. If we do not modernize the system, today’s newest generation of workers will find inadequate Social Security benefits awaiting them when they reach retirement age.
This should come as a revelation to no one. President Clinton outlined the need for Social Security reform as early as 1996.
Because the program has operated with a surplus – more money coming in than benefits going out – Social Security taxes have funded other federal programs for several years. But in 2008, baby boomers will begin to retire and collect benefits, which will begin to impact the surplus.
In about 12 years, benefit payments will outstrip payroll tax revenues, and the government will need to begin redeeming government bonds in the trust fund if it is to continue paying benefits at scheduled rates. Around 2041, all of the government bonds will have been redeemed. Unless the system has been modernized, benefits at that point will have to be slashed by one-third or taxes will need to be increased.
Doing nothing is not an option. The question is about when we are going to address this issue. The longer we wait, the larger the problem becomes and the more limited – and expensive – become the solutions.
For nearly 70 years Social Security has provided retirement and disability security for Americans. One out of six Americans currently receives retirement, survivor and disability benefits from Social Security.
It is structured as a transfer system in which money is taken from current workers and given to people who have already retired and other beneficiaries. The money is not set aside or invested in a personal fund.
The basic structure has worked fine for many years, but the United States has undergone dramatic changes. Americans are living longer and healthier lives, and families are having fewer children.
In 1950 there were 16 workers supporting every retiree. Today there are 3.3 workers for each retiree, and the ratio will decline to two-to-one by the time today's younger workers begin to retire, according to the Social Security Administration.
Several proposals are currently under discussion to address the issue, including increasing payroll taxes, lifting the tax cap on wages, increasing the retirement age and creating personal retirement accounts.
The government has increased taxes and reduced benefits multiple times since the program was created to keep it solvent. The last change came in 1983 when Congress increased the retirement age, reduced benefits for early retirees, phased-in tax increases over several years and enrolled all newly hired federal employees in the program, including the President and members of Congress.
At the program’s inception in 1937, payroll taxes were only one out of every 50 dollars the first $3,000 of individual income. Payroll taxes are now one out of every eight dollars on the first $90,000 of income.
Further increasing the retirement age is another option. Americans whose average life expectancy was 61 years when the system was created are now living to 77 years old.
Indexing benefits to inflation rather than wages would slow the distribution of benefits, which would resolve the issue by itself.
People are also looking at investing the current Social Security surplus in the stock market.
So far this year, the debate has largely focused on the proposal to allow younger workers the option of setting aside a portion of their payroll taxes for investment in safe personal retirement accounts with minimal administrative costs.
Such a program would be modeled after the program offered to employees of the federal government titled the Thrift Savings Plan, which offers participants five options of investing in safe, diversified index funds with varying levels of risk.
Personal accounts would reduce the burden on the Social Security safety net for tomorrow and provide younger workers with a simple, low-risk opportunity to build a nest-egg that they could pass along to their children and grandchildren.
However, personal accounts will not by themselves fix the system.
All options for fixing Social Security are on the table, and any successful proposal will likely include some combination of the various alternatives. No solution will be easy, but the sooner we act, the less traumatic the transition will be.
I look forward to discussing and debating the issue with my colleagues in the 109th Congress. At the end of the day, I hope we are able to achieve a bipartisan agreement acceptable to all people who desire to see Social Security remain a successful program for the 21st Century.
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