March 8, 2005

I just can't leave it alone

I've finally come to some conclusions of my own concerning Social Security. It helps that I've had a few of my questions answered and that I've read an article or two that cut through the politics and actually got down to talking about the problems and how to solve them.

It's difficult to get an honest look at what is going on with Social Security thanks to the various opinions of people about the President. The (mostly) liberal media examines the Social Security plan set forth by President Bush and doesn't even give it a fair shake. I'm not saying that privatization is the answer (I'm not saying it isn't either), I'm just saying that it isn't given a chance by most observers in the mainstream media. The people writing the articles have decided before doing any research that the President's plan will not work, so they spend their time very diligently digging up information that supports this idea. Their conclusions are not what bothers me, but the fact that they reach the conclusion before doing any research does.

That's why it was refreshing to read an article on Fool.com that talks about it without letting politics get in the way, other than to explain the lack of incentive for politicians to do what it takes to fix the problem. Basically, it comes down to this: in 15 years, it is likely the Social Security system will be taking in less than in pays out, leaving about 20 years after that until it runs completely out of money. Of course, that all will happen only if nothing changes in terms of payments and age requirements.

The problem with Social Security is demographics. In 1950, there were 10 people working for every person who was drawing a benefit from the system. In the next five to ten years, that number will drop down to two workers for every Social Security beneficiary. Obviously, this system is untenable in the long run. The system was designed many years ago when the life expectancy figure was not nearly as high as it is now, and it will only go up in the future. This is how an economics professor I asked about the problem answered me. To use data: the average life expectancy in America has gone up by about 10 years since 1950, not to mention the fact that the first crop of Baby Boomers is retiring, and there are only more after them. The average Social Security benefit is around $11,000 a year, so each person who lives an extra ten years withdraws an average of $110,000 more than they would have 50 years ago.

Several solutions have been posited to fix this problem (thankfully, none of them involve executing retirees to limit their use of the system). Privatization is the President's plan, and it sounds pretty good to me, a young, fairly financially savvy individual who understands the importance of saving for retirement. I know not everyone is in the same situation as I am, though. That said, I can see the merits of privatization, but the big stumbling block to me is that astronomic transistion cost that has been estimated in the hundreds of billions of dollars (on the low end). I'd like to think the problem could be solved without getting buried in an even bigger mound of debt.

The solution put forth by Fool.com relies on rethinking our view of Social Security as some sort of investment. It's not an investment, it's a government program designed to ensure a certain quality of life for people who didn't save enough. The I in FICA stands for Insurance, and perhaps it needs to be treated as such, so that the only payout is to people who really need it. Warren Buffet is a multibillionaire, but he still gets his Social Security check every month. It's like collecting disability insurance when you're not disabled. If these inefficiencies could be worked out of the system, it probably wouldn't go broke. Right now, the benefit level is somewhat tied to how much you put in, not how much you need it. Developing a formula that sets the benefit based on need would solve the insolvency problem.

Is this the best idea? I really don't know, though I'm sure it would cost less than privatization, and I'm not so much of a capitalist that I want to see retirees become indigent. The problem is that this sort of plan could never be implemented because it would reduce many retiree benefits, and retirees vote a lot more frequently than your average 24 year old. Politicians want to stay in office, and suggesting that seniors with more than three homes maybe don't need that $1,500 check each month will have the AARP in your office by the end of the day and your voicemail full of angry messages.

Something needs to be done, and a reevaluation of what exactly Social Security is and is supposed to do should be first on the list.

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