We are forced to pay taxes on several government sponsored programs for each paycheck we receive. One of these programs is Social Security. The forced savings are stored into a governement Trust Fund to be later issued out to those who paid into it when it is time for them to retire. Though this program technically has three major responsibilities (retirement, spousal benefits, disability benefits), the retirement benefits are what’s causing a mess.
Here’s how it works. You pay taxes every paycheck. 5.3% to be exact. Your employer pays 5.3% as well, for a total of 10.6% going into the Social Security program under your name. Though you may imagine the money being stored in a bank somewhere accumulating interest over time, it is not. Your money is sent to the IRS. At the end of the year, the IRS determines the amount of money you paid in Social Security benefits, and lets the Social Security Administration know. The SSA writes this amount down (or enters it into a computer) and the federal government spends it, usually to pay off what they owe to current retirees. However, before they spend it, the SSA orders bonds from the Treasury with this money (though there is not actually any money transferred, just all on paper). These a special governement bonds issued by the federal governement and used exclusively by the Social Security Administration. No one else can buy these bonds. Therefore, the government is essentially loaning itself money that it can redeem whenever necessary. Keep in mind, the SSA does not directly deal with the money, just the bookkeeping of it. Nor are these bonds anything other than government IOUs. Until recently, these bonds were just bookkeeping devices to keep track of the money. Now they are printed out and stored in a safe in Parkersburg, West Virginia. (Side note: I taught a class there a few years back. It’s a really nice place, but really small).
Here’s where the problem begins. As of right now, if the Social Security program was left as it is, we will start spending more than we are bringing in (paying retirees more in benefits than we are receiving in taxes by workers) by the year 2018. Once we reach this point, the SSA will have to redeem the bonds that they created. Remember, the bonds, or Trust Fund, are nothing but IOUs issued by the Treasury Department. Since the government has spent this money, it will have to be obtained by some other means. There are currently three options: Raise taxes, cut other government programs, or lower benefits.
This is where Bush’s plan to privatize a portion of the benefits paid from now on, known as Personal Retirement Accounts (PRA), comes into play. According to the plan, 4% of the 10.6% being paid in social security benefits by each worker will go into a PRA. The remaing 6.6% will continue on as it has been for decades. When the worker is old enough to retire, the government splits his retirment into monthly payments based on the PRA and the old social security system. They will calculate what the PRA would have generated in earnings based on the 4% they put in throughout their career after inflation, as well as the amount put into the traditional program. This ends up being a FAR greater return than if it was left untouched.
Using the traditional Social Security method, with my same pay rate as I am making now, when I retire at 67 (with a life expectancy of 85), I will make $3,115 a month. (Keep in mind that I’m pretty young and make a lot). Now, if I was to contribute all of the same money into a PRA system, with the same data provided before, I would make $14,638 a month. This is not under Bush’s reform plan however, this is straight through a PRA. Now imagine if 4% of your social security went to this. It would be no $14,638, but the 4% could sure add up. But, you can definitely see the difference between the two.
What’s wrong with this? It’s a little risky. You would essentially be investing in government bonds and large corporations. In a sense, it’s similar to an IRA or any other personal retirement plan, just a government sponsored plan. It’s not perfect, but it GREATLY enhances the system we currently have in place. But that’s just my opinion. And I’m always right.