On a cold and rainy January day, in the year 2029, the Social Security system as we know it, will come to a crashing halt. With no money left in the trust fund, the federal employees in charge of mailing out Social Security checks will instead have to draft apology letters to the millions of people born in the 1960s, 70s and 80s.
"We regret to inform you that although you have been sending large portions of your paycheck to us every-year since you were 18, we gave all your money to your parents' generation. The Social Security system is now bankrupt. So long, and have a nice retirement."
This is, of course, total fiction. But there is a very real possibility that without major changes, the current Social Security system will develop some serious problems around the year 2029. We should demand that the system be fixed now. Otherwise, there is a chance that our generation will never see much of the money we have put into the system. The current system is flawed because it has been a 'pay-as-you-go' system from the beginning.
Think of it this way. Imagine your grandparents are impoverished and your parents decide to help them out. Your parents give your grandparents a small amount of money that is just enough to cover their basic needs during their retirement years. But after spending all their money on your grandparents, your parents don't have any money for their retirement. So they turn to you. You pay for their retirement and your children are forced to pay for your retirement, and so on. Thus, you have the closed loop system that we have today.
In recent years the system has undergone some dramatic changes. There are so many people in our parents' generation that for the last decade there has been much more money being put into the Social Security system than was paid out to the current retirees; creating a surplus. This makes a lot of sense considering the fact that eventually, after our parents retire, there is going to be a lot LESS money being put into the system than is being paid out. There are so many people in our parents' generation that the number of retired people collecting social security benefits will double by 2025.
The problem is that the government has been spending the Social Security surplus almost every single year, up until this year. When the White House and Congressional Leaders had their budget summit on Oct. 20, they finally agreed to not spend the Social Security surplus for this year, but whether that is possible without resorting to budget gimmicks or even with a 1.4 percent cut in spending is doubtful.
Starting around 2029, the government will only be able to pay retired Americans 75 percent of the money they put in. By the time the class of 2000 is ready to retire in 2040, the system will be paying them back an even lower percentage of their money. Thus thanks to the population and policies of the baby boomers, the baby boomers' babies are going to be left with the Social Security tab.
So what can we do about it? One thing we could do is to have lots of kids. If there are a lot of people in our children's generation, we can take more money from them to pay for our retirement. Population growth aside, a better solution might be to just change the whole system. One idea is to replace the current system of paying for the previous generation, with a system of private retirement accounts. This still leaves us with the difficult task of paying for the people currently receiving social security benefits. If, instead of dumping the current system cold turkey, we phased it out over a gradual period of time, it might be possible to change to a personal account system.
The phasing out of the pay-as-you-go system could begin with everyone turning 18 this year. None of them would have to pay Social Security taxes, but instead would have a personal retirement account with the option of investing the money or putting it into the old system. In exchange for the freedom to get a higher rate of return, they would have to pay slightly higher capital gains taxes on any profits. This money would be used to pay for the older generations' benefits. Older working Americans would continue to pay small percentage of the current Social Security taxes; adjusted with age (19-year olds would pay 10 percent of what they currently pay, 44 year-olds would pay around half; and 62 year-olds would pay roughly the same amount of Social Security taxes.)
The Social Security payments of all the 19-to-62 year-old 's would have to be supplemented with additional funds, possibly from the current surplus, in order to pay for the benefits of people that are currently retired. But not as much of the surplus would be used, as with a cold-turkey transition. Each year there would be less money coming into the system, but also less money being paid out, since each generation would only get paid what they put in. The system would eventually begin to pay for itself and we might actually have a chance of getting to see some of our money again. At the very least, the phase out system might prevent our parents from spending our retirement money on that brand new 2028 Ford Explorer.
