It is time to fix Social Security again. For 70 years, Social Security has had remarkable success in reducing poverty in older Americans and providing a stable retirement income for millions of workers. However, today's Social Security is very different from the program that began in the middle of the Great Depression.
The question that we face today is how to re-invent Social Security so that my daughters will have close to the retirement security that their grandparents receive today.
David John is a research fellow at the Heritage Foundation and a former Congressional staff member.
Change has been a constant feature of the program. In 1935, Social Security did not provide benefits to spouses or families, the disabled, or even farm workers. It also did not include most employees of nonprofits or state, local and federal government workers.
Over the years, Congress has raised and lowered both benefits and Social Security taxes many times. Many of the features that we take for granted today are relatively recent. Annual cost-of-living increases did not appear until the Nixon administration, and the current benefit formula did not appear until the time of Jimmy Carter.
Now, Social Security has to adjust to a new century. Its mission should remain the same — to provide retired members of our society with a level of income security that cannot exist without some form of government-sponsored retirement program. But Meredith, who is 18, and her younger sister Megan will retire in a different America from today, and the Social Security that covers them will have to change also.
Our society is growing older and people are living longer. A male born in 2005 can expect to live about 8 years longer than one born in 1940. A female born today can expect to live almost 9 years longer that one born in 1940. Combined with the impending retirement of the baby boomers, this longer lifespan means that the 16 workers who in 1950 paid the cost of one retirees benefits will continue to shrink past today's ratio of 3.3 taxpayers to retirees to two workers per retiree by about 2030.
Under the current system, my daughters would have to pay their own family's expenses and the cost of one retiree. That is a heavy load for our kids and grandkids to bear.
Doing nothing is not an option. Combined with Medicare's looming deficits, this country's two major programs for older Americans will need about two-thirds of the income taxes that are collected in 2040 in addition to the payroll taxes that currently finance them. The price of whatever changes we decide upon goes up about $600 billion every year, so delay is not an option.
It is true that any combination of tax hikes and benefit cuts could keep today's system going, but the changes are not small. In order to pay full benefits between 2017 and 2080, we would have to invest $5.7 trillion of today's dollars — $1.7 trillion to repay the bonds in the trust fund and $4 trillion to pay benefits after the trust fund runs out in 2041. Investing that money today at 3 percent interest plus inflation would raise about $25 trillion.
Raising this money would have very serious consequences. It means that Meredith and Megan would be paying higher taxes for lower benefits.
The challenge then is to create a Social Security that provides an acceptable level of retirement income security at a lower cost. The first change will probably be to encourage people to work longer than they do today. Retirement should change into a gradual process that includes part-time employment.
The second change will be to slowly lower benefits for people who have a high level of other retirement income. Social Security benefits need to be given first to the one-third of workers — mostly lower income — who have no other retirement savings.
Most importantly, fixing Social Security means moving away from a system where today's Social Security benefits are paid from the taxes of today's workers to one that allows younger people to save a portion of their Social Security taxes in an account that can pay at least some of their retirement benefits. These accounts do not have to earn high returns to do better than today's Social Security.
If Meredith could invest her Social Security taxes in U.S. government bonds, she would have enough savings to receive twice what she is promised. Even with accounts that only cover a third of her payroll taxes, she would be able to build enough savings to offset some of the coming benefit changes.
Social Security will have to change. Change is a constant in life. We have a choice between patching up the old system again and again, and being creative and building a Social Security that is financially stable. Thinking small will not improve our kids' and grandkids' retirement security.