Monday, May 02, 2005

The Weaning of America

Unless the program is significantly reformed, Social Security (SS) will become insolvent by 2041. According to, "insolvency" means "one who is unable to pay his debts as they fall due". In 2041, SS will no longer be able to pay promised debts and will be insolvent, as obligations will by that year exceed income to the fund, as the trustees of the SS Trust Fund recently reported.

If nothing is done to correct this impending insolvency, the program will by 2041 be able to pay recipients of SS only 74% of promised benefits. According to the SS trustee's report, one solution to the impending insolvency of the program is the "immediate increase of 15 percent in the amount of payroll taxes or an immediate reduction in benefits of 13 percent (or some combination of the two)." I am confident that almost no one would want to see their taxes increased or benefits reduced by that much to protect a system so fundamentally flawed as SS. What is needed, therefore, is a gradual weaning from the current pay-as-you-go, federally controlled system to an ownership-based system, as broadly outlined by the president in his news conference last week.

A system where individuals have control of their own retirement money, and have choices for how the money is invested, will align the retirement goals of all Americans with the continued success of our market-based economy. The money put away for retirement will be put back into the economy where it can be used by business to create jobs, provide goods and services, and build a better, more financially secure America.

For some people, the idea of investing in the stock market is very intimidating, but there can easily be selectable portfolios with varying degrees of risk and reward to protect those with little or no investing experience. The system would need to be gradually phased-in starting with younger workers, where their investment time-horizon to retirement is long enough that any market fluctuations will both teach them how to invest, and won't hurt them long-term. Finally, as one approaches retirement the system could restrict the type of investments available to minimize risk and protect the retirement nest egg from sudden market changes just before retirement. And of course, there would still be a 'safety net' to ensure the dignified retirement for the poor and those who, for one reason or another, simply cannot provide for themselves.

The key to this system, though, is the alignment of retirement goals with the overall economy. We all participate in the economy, and when our retirement funds are invested in and count on the future success of the economy, it will put us all in the same boat rowing in the same direction. It will lessen the tax burden on Americans, and will make the public funding of retirement for the poor easier for the taxpayer and more fullfilling for the recipient. Remaining tax dollars can go to funding other priorities, such as the even more urgent Medicare crisis. Best of all, we won't have to revisit this same argument again to try to "save" a system that is by its design destined for failure.

This post also appears on Blogger News Network.

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