Social Security system must be changed

There has been much talk lately about the current state of the Social Security program. Loyola's students would be wise to take note of this issue; it will play an important role in their future. The Social Security system is headed for insolvency. It will require sacrifices and painful decisions by the American people to avoid disaster.

Why should this matter to 21-year-old students? Around 2050, this generation will begin to retire; we can expect to receive less than 75 percent of the benefits promised by Social Security. The fact is that in 13 years, the Social Security Agency is projected to begin paying out more in benefits than it collects in taxes. By 2042, the system's reserves will have run out; it will no longer be able to meet its promised obligations. The SSA board of trustees reports, "The sooner adjustments are made the smaller and less abrupt they will have to be." The country must take the right actions quickly to make any transitions as painless as possible.

How is it that Social Security, known as one of the "most successful" government programs in American history, is on the brink of failure? The simple way out is to blame America's changing demographics. It is true that the ratio of workers to retirees is declining quickly; there will be less money coming in than going out. However, it is the underlying failures of the system that really account for the looming crisis.

The biggest Social Security misconception is that workers pay into a fund, their money earns interest and they get it back when they retire. Workers don't get "their money" back. Today's workers pay for today's retirees. This is a "pay-as-you-go" system. The system currently does have reserves, but these earn a rate of return well below that of other potential investments. For many retirees the money that the government sends to them has less purchasing power than the money the retirees sent to the government.

When President Franklin Delano Roosevelt created Social Security, he intended for it to be a safety net for retirees who had nothing else to rely on. Instead it has transformed into the main source of retirement money for two-thirds of all American retirees. People have grown accustomed to the past stability provided by the SSA. Savings rates have declined. Americans don't have a strong incentive to save for themselves because they believe that the government will do it for them. America's heavy reliance on the SSA has increased over time while the foundation of the system has become increasingly unstable.

Fortunately for future retirees there are many proposals on the table that may allow Americans to continue to use Social Security as an important basis for their retirement. Some of these proposals offer more promise than others.

A program that would allow younger workers to divert some of their payroll taxes into private accounts would be a welcome change to the current system. This will bring all of the benefits of ownership to a system that sorely needs them. People will see their savings grow as they work. They will see that the harder they work the more savings they acquire. Most importantly, they will see that the money is theirs; their work is paying off.

Allowing workers to invest money from these accounts into stocks and bonds would only sweeten the deal. This would allow individuals to earn higher rates of return on the money that they have contributed. The more freedom people are given to make decisions with their money, the stronger the system will be.

Some politicians have likened investing to gambling when arguing against this idea. Funny how these same politicians subscribe to a very similar investment program. The truth is that the best way to become wealthy is to make conservative, long-term investments -- exactly the type that private accounts would allow.

While private accounts are a step in the right direction, they may not be enough to completely solve the crisis. Other sacrifices must be made to complement this plan.

A second proposed solution calls for a reduction of future benefits for retirees. Politicians kick and scream when presented with this notion. For them it is unforgivable to voluntarily reduce benefits. At the same time, it is no big deal that in 40 years there will be no choice but to reduce benefits by more than 25 percent. This is completely illogical.

Some Democrats have put forward their favorite solution to any problem: tax it. Raising payroll taxes could offset the gap and bring Social Security out of the red. Of course, the SSA reports that the tax rate is already an astounding 12.4 percent and most "workers already pay more in payroll taxes than they do in income taxes." Plus, the rate has been raised 20 times since 1935; how much higher should it go? The SSA estimates that a rate of at least 18 percent will be needed to cover current commitments. Rates this high will strain small businesses, stifle economic growth and increase unemployment. They will also crowd out private retirement savings and increase the burden of Social Security, which will only make the problem worse. In this case, as usual, raising taxes is no solution at all.

Probably the most disgraceful suggestion is the Robin Hood proposal (i.e. Communist). Although it is altruistic in nature, the consequences of this plan would be disastrous. Simply put, "Robin Hood" claims that the system is in danger because of rich people. People who don't rely solely on Social Security payments shouldn't receive any at all. The money that they would have received should go to the poor people that need it. This would provide an even bigger incentive for people to not save for themselves than the current system already does. Workers would actually be punished for thinking ahead and taking care of themselves and their families. This move away from personal responsibility would actually increase the problems that the system faces because people will rely more heavily on the system and less on themselves.