Social Security Robbing the Cradle

And you thought your grandparents loved you…

By Dineka Dayaratna
From the February 2005 Print Edition

As part of his New Deal program to get America out of the Great Depression, President Franklin Delano Roosevelt instituted Social Security as a way to provide a governmental pension for America’s seniors. Since then, changes in demography have precipitated a significant depletion of funds that will soon render Social Security unable to pay for our generation when we retire. Serious reform is crucial, as a lack thereof would further exacerbate the situation for our children’s and grandchildren’s generations.

America has a markedly different demography than it had during the time FDR, Truman, and Eisenhower. In 1950, there were sixteen workers to support each beneficiary of Social Security. Today that number has dwindled to three workers per beneficiary, and will continue to decrease. As a result, taxes will have to be raised exorbitantly if no serious reform is implemented.

So what does this mean for us teenagers and twenty-somethings? Social Security is not a fascinating or exciting issue to most of our generation, but it affects us very directly. In our lifetimes, you and I will be paying large sums of money to fund pension checks for people we don’t even know — people who could, and should, have been planning and saving for their own retirement years over the last four decades or so.

When a government program attempts to redistribute wealth in this way, it is impossible for everybody to win. The beneficiaries are happy, but that money has to come from somewhere — us. We will have to watch increasing portions of our paychecks disappear to fund this program, at the same time that we are trying to pay off student loans, get married and start families, or, heaven forbid, become homeowners. While trying to start our own lives on the right track, we should not have to pay money to people who have had their whole lives to provide for themselves.

In addition to being unfair, Social Security has become less and less feasible with time — and not only in America. Most European countries have done nothing about their failing social security programs and are now facing the consequences. The Organization for Economic Cooperation and Development has estimated that the net present value of future social security commitments has amounted to two-and-a-half times the size of the GDP in nine out of thirteen European Union nations — an unfair tax burden to the working people of these countries.

The United States is destined to share the fate of these countries under the current system. According to the Social Security Trustees, inaction in fixing the problem will cost us, along with our children and grandchildren, an estimated $10.4 trillion in tax hikes. This is almost twice the combined wages and salaries of every working American in 2004. By 2018, the federal government will begin to pay out more in Social Security benefits than it takes in, and these differences will grow every year thereafter. The longer we wait, the more difficult the problem will be to solve.

The United Kingdom is the one European country that hasn’t had such problems with social security. In 1986, Prime Minister Margaret Thatcher gave workers the option to invest their taxes in personal retirement accounts. The country’s pension assets are now greater than the rest of Europe combined. More importantly, the program imposes no crushing tax burden on the British people.

Comparatively speaking, the UK plan would be most provident to the American people and more reasonable to taxpayers. President Bush must propose optional private accounts for Americans to begin investing in as soon as they enter the workforce. The federal government should provide citizens with guidelines with suggestions about how to invest and when, without having to raise the retirement age.

In the short run, these investments could leave the government short of money. As a result, the government would have to borrow more, perhaps issuing over $2 trillion in extra bonds over the next generation or so. However, this transition cost would generate an equal and opposing transition benefit. Workers who chose to use personal accounts would accept a corresponding cut in Social Security payments from the government, reducing the nation’s debt to future recipients. Thus, privatization would simply substitute new promises to pay bondholders for the old promises seniors have already been getting. If this reform is designed properly, the net transition cost would be zero.

Critics may argue that such an amount of money in bond insurance would drive up interest rates. However, the issuing of government bonds would be countered by the new capital amassing in private retirement accounts. Government borrowing would increase; and, as a result, so would private saving. Net national saving — and interest rates — would remain untouched.

Social Security can and must be successfully reformed and modernized for the 21st century. The current system places an increasingly unfair burden on younger Americans, who may be struggling to get their own lives in order. A Cal student who takes out loans to pay for his education should not be forced to provide someone else’s retirement funds. I should not pay for another person’s retirement, and I do not expect anybody to pay for mine. If members of the liberal left wing — including John Kerry, Howard Dean, Ted Kennedy, and Hillary Clinton — want to preserve the old system, they’re more than welcome to — in France.

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