Amid the ongoing national debate about Social Security reform, some pose the question: why now? The answer lies largely with the baby boom generation.
As early as 2008, the eldest baby boomers can begin receiving Social Security retirement benefits. In the years that follow, this generation’s retirement – combined with the fact that Americans are living longer – will put great pressure on our Social Security system.
To get an idea of the magnitude of the demographic shift, consider that between 2005 and 2025, the number of people age 65 and over is predicted to rise by 69 percent, while the number of workers whose taxes finance benefits is projected to grow by only 13 percent.
The demographic crunch matters because of the pay-as-you-go nature of our Social Security program, in which current workers’ payroll taxes fund the benefits of current retirees. This worked well in Social Security’s early years, when about 42 workers paid into the system to support each beneficiary, but that ratio has fallen to just over three workers supporting each retiree today. After the baby boomers retire, the ratio will be two workers per retiree.
The 2005 Social Security Trustees Report makes clear the financial impact of the demographic shift. According to the Trustees, Social Security’s surpluses turn to deficits starting in 2017, as more money begins flowing out of the system to pay promised benefits than comes in through tax revenues.
Another serious systemic problem is the declining rate of return that workers get on the tax dollars they pay into Social Security. Currently, 70-year-old retirees get about a 4.5 percent return on what they paid into Social Security, but today’s 40-year-old workers will receive only about a 1 percent rate of return on their Social Security payments.
And today’s young children can "look forward" to a negative 1 percent return or worse.
The time is ripe for lasting reform that ensures all generations – from seniors, to baby boomers, to their children and grandchildren – will be able to count on Social Security and that gives younger workers the opportunity to get a decent rate of return on their investment in the program.
Legislation that I have introduced with Sen. John Sununu (R-N.H.) would accomplish this, without resorting to tax hikes or benefit cuts. The key is allowing large, voluntary personal accounts for younger workers that earn better returns than traditional Social Security and, over time, cover more and more of Social Security’s financial obligations.
Under our plan, the chief actuary of Social Security has found that permanent and growing Social Security surpluses begin in 2038 and permanent solvency is reached in 2051. It would also eliminate Social Security’s $12 trillion unfunded debt for the foreseeable future.
During the first decade, our legislation phases in voluntary personal accounts, giving workers under age 55 the chance to divert, on average, 3.2 percent of the 12.4 percent Social Security payroll tax into a tax-free personal account.
Then, starting in 2016, workers would be able to shift 6.4 percent, on average, to their account. The account structure is progressive, to help lower-income workers more rapidly build retirement savings.
Under our legislation, workers who prefer to stay with traditional Social Security can do so. At the same time, safeguards would guide and protect those who choose to participate in personal accounts. For example, personal account holders would be automatically enrolled in a "life-cycle" fund that adjusts the owner’s portfolio depending on his or her age, shepherding near-retirees into very safe, government-backed bond funds.
Workers could stick with this default option or select from a list of five index funds like those offered in the Thrift Savings Plan – a 401(k)-type plan that Members of Congress and federal employees have.
The Social Security Administration would manage the accounts, which are backed by a guaranteed minimum benefit equal to what Social Security promises under current law.
Everyone currently 55 or over would remain covered under the traditional system, and survivors and disability benefits would also continue unchanged under our legislation.
To finance the transition, our plan would stop Washington’s 35-year raid on Social Security tax dollars and dedicate the Social Security surplus – projected until 2017 – to Social Security rather than other government programs. This step would help immensely, as the surplus over the next 10 years, including interest, is more than enough to cover the transition cost over the first 10 years of the reform.
In addition, our legislation would slow the growth of federal spending by one percentage point a year for eight years and transfer the savings to Social Security.
Finally, the anticipated increase in corporate tax revenue, sparked by increased investment through personal accounts, would go to the Social Security Trust Fund.
By offering a sizable personal account option and taking the necessary steps to instill greater fiscal discipline, Congress can put Social Security on solid financial footing and make sure that future generations of retirees can count on the program being there for them, as it is for today’s seniors.
Congressman Paul Ryan (R-Wis.) represents Wisconsin’s 1st Congressional District, which covers the southern halves of Milwaukee and Waukesha Counties, the eastern half of Rock County and all of Racine, Kenosha and Walworth counties.
June 24, 2005, Small Business Times, Milwaukee, WI
