The year 2005 brings with it many questions about a plethora of hot topics. Some may still be thinking about the election and others the war in Iraq, but the topic that demands attention is the one that many of us know nothing about: our Social Security crisis. The pay-as-you-go system is dying a slow death, and if we don’t do something about it, 2028 will hit us with empty pockets. All Americans, especially our generation, need to spend the money wisely.
When one reviews the system, it may be concluded that taxes are paid and disbursed again when the taxpayer retires, but it is not that way at all. The taxes paid now for Social Security are going to already-retired workers. Furthermore, it is nearly impossible to calculate a rate of return for an individual with the fluctuating interest rates. Once that is understood, it becomes clear why our current system needs an overhaul.
Although the Social Security system may be hard to explain, the reason why it’s heading for a cliff is rather easy to discern: demographics. Indeed, the people of the United States are the cause of the demise of their own Social Security. The life expectancy is increasing while the number of children born is decreasing. This means that people are outliving their Social Security and there are not enough workers to support the system. Franklin Roosevelt’s safety net worked great for a while, but it is clear that the times have changed.
William Shipman, the co-chairman of the Cato Institute, had some eerie comparisons. In 1950 the ratio was 16:1, meaning for every retiree there were 16 citizens paying taxes. Today, for every retiree there are 3.4 taxpayers. This means that the rate of return for a current retiree is only 2 percent.
The over-antagonized Social Security plan proposed by the Bush administration is a great idea. If implemented, we could have control of our own retirement, and the fear of the government spending it is over. The plan curtails government control and gives much more responsibility to the individual. The individual can set aside a portion of their paycheck to invest in private capital instead of handing it over to the government. So, with a bit of responsibility and risk comes more profit.
Many oppose it, though, as investing in stocks and bonds is risky business. People are afraid to control their own destiny in this specific area because there is no one to blame but themselves.
The numbers say it all. On average, the rate of return on private investment is approximately 4.6 percent. In the current Social Security system it is 2 percent. The Cato Institute made this very simple to understand. It took an average citizen earning $30,000 a year and paying $120,000 to Social Security over a 40-year working lifetime. Under our current system, that worker will only receive $180,000 in Social Security benefits, but if that worker invested in private capital, he or she could receive $344,000 in benefits.
It is easy to see why private investment is smarter than our current system. With these foregoing estimates it is hard to believe why anyone wouldn’t want control of their own retirement.
However, it is only an estimate, and the stock market could take a huge plunge, but that is very unlikely. So ultimately you have to ask yourself what makes sense. You can either sink with our current Social Security system or look for new options. See you in 2028.
Erik Raymond is a junior majoring in economics and pre-law.