BOOMERS COULD BUST OUR SOCIAL SECURITY SYSTEM
By Tim Penny

Will I have enough money to retire? Every baby-boomer is now asking themselves that question. For some it is a question that keeps them up at night - because as retirement approaches it is becoming clear that their nest egg is too small. For them the issue is grave. The risks are dire. They no longer have time to plan and prepare.

Not that this is anything new. Current retirees often say they haven't saved enough for their own retirements. That is because people are retiring earlier and living longer - and savings and investments that once seemed adequate are being exhausted.

Wharton economist and retirement policy expert Olivia Mitchell - featured in For Our Grandchildren's "Expert Q&A" - tells us: "Many Boomers failed to plan and save adequately for retirement. More than half of today?s retirees rely on Social Security for more than half their income. This status quo will not hold in the future, since when the Boomers retire, there will be an inevitable cash crunch." Alarmingly, for the first time since 1933 (when the evident need for government mandated savings led to the creation of the Social Security program), the savings rate of the American worker is negative. Today, for millions of working families, household and consumer debt is outstripping their savings. This despite the need for a savings rate of approximately nine percent of payroll if we as a society are to be properly prepared for the future.

So Boomers beware. By not saving enough in other ways for retirement, you will be relying on Social Security to provide more that it is capable of offering. However, just as many boomers have not made prudent financial plans, the Social Security program itself is also seriously under-funded. Accordingly, by 2040 the system will only be able to pay about 74% of promised benefits, unless the politicians fix it.

But there is no easy fix. Many - including the AARP - assert that all "promised benefits" to baby-boomers must be paid. But how?

The AARP often touts a 2 percent payroll tax increase as one way to provide revenue to finance Social Security's baby-boom related costs. Is that fair to younger workers? If to date the Social Security system has not been honestly financed, is that the fault of the next generation? If baby-boomers have not made sufficient plans for their own retirement, is that the fault of their children? By what logic should coming generations be burdened due to our past and present shortsightedness?

I attended the 2006 Saver's Summit - sponsored by the U.S Department of Labor - which brought focus to the need for policies that improve America?s savings habits. Much of that Summit's agenda was driven by the coming retirement of the baby-boomers.

Among topics discussed at the Summit were: the challenge faced by older workers who are nearing retirement with insufficient savings; the lack of employer provided retirement plans within the small business community; the difficulty faced by low income workers in setting aside adequately for their retirement; and how to enroll more young workers in savings plans to allow them to secure the benefits of lifetime savings.

There are no easy answers to all of these retirement policy questions. However, meaningful Social Security reform must be part of the answer.

In addressing Social Security's future, there has to be a better way than the "tax and spend" agenda of the AARP. We need to craft a solution that is fair to coming generations.

As cited earlier, Social Security is the only mandatory retirement plan for America's workforce. As such, it must be modernized to meet the needs of today's workers and tomorrow's retirees. Personal accounts within Social Security would guarantee that every worker - whether young or low income or employed by a small business - would have an investment account with their name on it. This account would start with the very first paycheck and be augmented by regular contributions throughout a worker's career.

A cardinal rule for investing is to start young to allow savings to benefit from the magic of market growth and compound interest. Another cardinal rule is to set money aside in an investment account on a regular basis. Both of these investment goals are achieved if workers are given the opportunity to establish a personal account with a portion of their Social Security payroll taxes.

Sadly, none of today's Social Security taxes are being honestly saved and invested for the future. For decades, payroll tax surpluses have been spent by the federal government on other programs. This has to stop. There is a better way. Give younger worker's an opportunity to invest some of their payroll tax in an account they own and control. In this way, Congress could never spend the money for other purposes. The earnings on these investments will help build a strong nest egg - assuring coming generations that they will have enough money to retire.

Back to Unfunded