SOCIAL SECURITY is the biggest monetary crisis facing our country. It will be completely bankrupt by the time the current youngest working generation retires, because people are living longer, retiring earlier and there is a shrinking base from which to fund the program. To keep the program as it stands would result in significant tax hikes or benefit cuts, which would slow the economy and cause even further problems. Fortunately, President Bush has proposed methods that will begin to solve this problem.
Social Security is funded through the payroll tax, which is a 12.4 percent tax on wages, half paid by the employee and the other half paid by the employer. The problem is that payroll tax revenues have been dropping sharply while benefits paid to retirees are growing, and according to CNN.com payments will exceed tax revenues by the year 2017 -- closer than the Social Security trustees' original estimate of 2018. Excess revenues have been saved from previous years, but as both the White House and CNN report, "by 2042, when workers in their mid-20's begin to retire, the system will be bankrupt."
According to White House statistics, when Social Security was first established during the New Deal, the ratio of workers paying the payroll taxes to retirees receiving benefits was 16 to one. Now that ratio has fallen to 3.3 to one, and by the time the system finally goes bankrupt will have fallen to two to one or less. With the current system, there are simply not enough workers paying taxes to cover all the benefits being paid to retirees.
The Cato Institute says that "doing nothing is a de facto benefit cut of (at least) 27 percent for future retirees" just to maintain solvency. That then, is the first option for fixing Social Security: simply reduce benefits. However, Democrats have voiced their extreme opposition to that idea, and as CATO says "have left the door open to only one 'reform' option: a tax increase." Such an increase is the traditional way to fix things in liberal political circles, especially since wealthier, generally conservative, people will pay the largest burden.
A tax increase, however, is the worst possible move. According to the Competitive Enterprise Institute, "additional tax hikes would operate as a tax on labor, reduce job growth and work incentive, further distort business decisions... (etc.)." Take some economics classes at the University and you will easily see that arbitrary tax hikes are very bad for the economy. In the long run they will only inflate the problem further because the wages from which the taxes are taken will fall, or at least grow far more slowly, as the economy slows.
The most logical option at the moment is President Bush's plan for Social Security. Initially laid out in his Feb. 2 State of the Union address, the President's plan is this: Workers can invest part of their payroll tax (up to one-third) in specific investment account options monitored by the government -- a plan currently available to federal employees.
In return, workers would agree to receive reduced Social Security benefits when they retire, and would instead receive payments out of their investment fund calculated to keep them above the poverty line. Though there would be short-term transition costs, the long run benefits are far greater, and fixing Social Security in the long run is the far more important problem.
Investment is, of course, more risky, but the potential benefits easily outweigh a system cannot continue to exist without major tax hikes, and that really doesn't pay a lot to begin with. It is critical because in addition to reducing outlays on payments to retirees enough to keep the system afloat, workers who choose to invest will almost certainly end up with more money in the long run.
Most importantly of all, however, is the fact that these funds will be clear, identifiable assets that will definitely be there when the worker retires, and that some measure of control will have been returned to the taxpayer. Simple interest rate returns alone will be greater than payments that likely will not be there based on future returns versus the number receiving benefits. This will not only increase confidence in the system, but the investment will spur economic growth and cause greater prosperity in general.
President Bush's plan is a major step forward in several directions. First of all, it promises to fix a system that will undeniably collapse in the next 40 years and that would be extremely expensive to keep as is. Second, it offers taxpayers a better future that they would have under the current system.
Most importantly of all, however, the Social Security plan returns control over money to the people who earned it. Social Security in itself is an extremely questionable concept in a society that values freedom because the government is effectively taking the taxpayer's hard-earned money to socially engineer society. President Bush's plan to fix it is thus not only a sound financial step, but it profoundly justified moral step as well.
Allan Cruickshanks is a Cavalier Daily viewpoint writer.
Read More
WILLIAMS: The future of Virginia is on the ballot this fall
By Ryan Williams | 23 hours agoHence, voters must make it their top priority to think critically and closely as they decide who their ballot will support this fall.
PARTING SHOT: On the art of walking and chewing gum
By Nathan Onibudo | 3 days agoStudent journalism, and maybe even life more generally, is about holding space for multiple conflicting truths.
PARTING SHOT: Confessions of a nepo baby
By Grace Thrush | 3 days agoWhile I can’t point to one specific “aha” moment where I finally started to dispel my self-consciousness and claim my pride for the paper, I got there gradually over the course of my term as managing editor.
