Social Security is a major issue in today’s political field. The problems with it and the many proposed solutions are debated daily. Nearly every Californian citizen is enrolled in Social Security yet few know the full extent of the problem, or how the system works.
Now that we understand the full extent of the problem with Social Security, we can look at the proposed solutions and judge how well they will fix the problem. Different solutions include “Personal Retirement Accounts” (PRAs), diversifying Social Security’s trust funds’ investments, and raising payroll taxes, or the amount of wages subject to payroll taxes.
The most well known option is PRAs (Personal Retirement Accounts); this is the option on which President George W Bush’s plan was based. PRAs are not used to solve Social Security’s lack of funding, but to reform the system for future generations. This is part of a comprehensive solution to give younger workers the option to save some of their payroll taxes. Through PRAs, whatever money unused by the retiree could be passed on to children and grandchildren instead of the government. This system of Personal Retirement accounts is similar to the Federal employee retirement program known as the “Thrift Savings Plan” (TSP). In this system, PRAs could not be emptied all at once, but would be paid out over time as an addition to traditional Social Security benefits.
In the President’s plan workers would be permitted to allocate their PRAs among a small number of highly diversified index funds, as patterned by the TSP. PRAs would be protected from sudden market swings on the eve of retirement by being automatically invested in a “Life Cycle Portfolio”. Meaning when the worker reaches the age of 47 the portfolio would gradually shift the allocation of investments so it is weighted more heavily toward low-risk bonds, unless the worker and his spouse opt out by signing a waiver claiming they know the risks involved.
This plan of PRAs is not a solution to Social Security’s financial problem. This solution seems to be the only way to make Social Security a decent investment for future generations. PRAs would permanently change the very structure of the system, unlike the Band-aid fix of raising payroll taxes. The President’s plan will affect only those born after 1950; the system will remain the same for anyone 55 or older, those soon to be or collecting Social Security.
The problem with PRAs is that they will result in bringing in less income (part of the workers payroll taxes will be invested separately) at the very moment, we need more. Due to the changing demographics, less money is coming in for the growing number of retirees. Companies such as AARP are adamantly against PRAs because they “weaken Social Security.” Yet finding any plausible solution to Social Security’s problem is not an easy task. AARP has proposed two solutions not involving PRAs.
Those being: diversifying the Social Security Trust Funds’ investments, and raising the maximum amount of wages subject to payroll taxes. These solutions have their own set of problems. Raising payroll taxes enough to keep the government’s entitlements promises to future retirees would require doubling or tripling payroll taxes; that means 30 to 40% of a worker’s wages would go towards retirement benefits alone, not to mention his other federal, income, state, and local taxes! Raising payroll taxes is a temporary fix, since 1950, payroll taxes have been raised 20 times and we still have a problem. Diversifying the Trust fund’s investments is also temporary and will not solve the structural problem with Social Security.
None of these plans, besides raising taxes, brings in the needed higher revenue to pay for these coming retirees. Yet simply raising taxes will not solve the problem. The President plans to work with congress to find a feasible solution, involving his proposed PRAs. There is no written plan, but we know and are finding out more every day, the very structure of the system must be changed; PRAs are a way to change the structure of the system without quitting it.
There is no perfect solution yet, only different elements needed to solve the rising failure of Social Security. These elements; a reformed structure and a higher income during the transition to a new structure, are needed to find a solution for Social Security. We have patched the problem many times and we now need a permanent solution, or the system will fail and a generation will be left without the benefits they have paid into the system.