One of the most heated debates being held in Washington today is concerning the present status of Social Security and its future form. Those advocating privatization of the entire program as a panacea for the problems that it will face in the coming century have been met with sharp criticism by those who feel that such a plan could destroy the economy all together. Nevertheless, it has become clear that time is running out for the government to plan for and enact changes to Social Security. Such a transformation cannot take place overnight and it will take years of preparation to get the system ready for the influx of senior citizens that it will have to support in the coming decades.

The Social Security program was enacted in 1935 in order to prevent the poverty and destitution that affected millions of people when their savings were lost after the stock market crash of 1929. The program was not intended to end the Depression itself, but it was one of the many steps taken by New Deal legislation to prevent this situation from recurring.

The changes to the program since its beginning have been small. The taxes collected from payrolls were deposited into "trust funds" established in the U.S. Treasury, which retains the excess to pay for the government's non-Social Security expenses. When the government is running a deficit, this money helps to finance these debts by purchasing bonds. However, when the Social Security trust funds do not have enough income to finance the payments they must make, they must make up for the deficiency by redeeming these bonds. The cash the Treasury must pay for the redemption of these bonds must therefore obtain this money from other sources, such as the sale of bonds to the public, taxes, or the printing of money.

Until 1974, the Social Security trust funds never really had a significant deficit problem. In 1972, Congress increased the benefits by twenty percent, much more that that year's rate of inflation, and made future benefit increases automatic and annual. To make up for these added stresses to the program, the government has raised the payroll tax rate several times. However, the automatic adjustments made to Social Security every year are faulty because of the way they calculated inflation by taking into account cost of living adjustments (COLAs), as well as increases in the national average wage, a flaw that is sometimes referred to as "double-indexing."

Because of these stresses on the system, Social Security will begin to run a deficit in 2016. Within five years of that date, the annual deficit will be $200 billion, and ten years later it will be nearly $1 trillion. According to Social Security's Board of Trustees, the real problem will not come until 2036 when the program will go broke; they estimate that there will be a "nest egg" of $5.6 trillion in the trust funds until 2024. However, the money in those trust funds is generally "loaned" to other government programs and it is possible that they will not be able to pay back Social Security when it needs it most. The Treasury's options for raising this money are limited and unattractive. It is unlikely that there will be enough demand from the public for government bonds, and the idea of raising taxes is always resisted by politicians and their constituents. Printing money would only raise the inflation rate, and since Social Security benefits increase with inflation, the subsequent benefit costs would only rise.

The reality that many politicians and people nearing the age of retirement have to face is that the Social Security program will not be as lucrative for future retirees as it has been. People who plan to retire in the next twenty years have to start saving now to ensure that they can have a comfortable life after they stop working. The kind of nest-egg that a person needs to retire cannot be saved during the last few years of employment; it must be accumulated over a much longer period of time. Furthermore, changes to the Social Security program will have to implemented soon if they are to be ready in time for these deficits. The most obvious step is to increase Social Security taxes. Another option is to tax the benefits of retirees with moderately high incomes, presently defined as over $25,000 for individuals and $32,000 for married couples. Right now, taxes come out of up to 50% of Social Security benefits, but this percentage could and most likely will be raised in the near future. Reductions in COLAs could also save a great deal of money without substantially lowering an individual's benefits. Finally, the national retirement age, the age at which a person can begin to collect benefits, is currently 65, 67 for those born after 1959. It is not unreasonable for this age to be increased by Congress, especially considering the longer life spans and better health care that now make it possible for most people to work longer.  

Some financial analysts have proposed a plan calling for the privatization of Social Security. Essentially, such a system would allow workers to redirect their payroll taxes to individually owned investment accounts, similar to 401k plans or Individual Retirement Accounts. At the same time, the government would have to find a way to guarantee benefits to those currently receiving them. Those favoring such an approach point out that private investment allows for high returns. However, opponents of this idea point out that estimates of the returns it could provide are based on the past performance of the stock market, making the actual pay out of retirement benefits uncertain. Furthermore, the economic results can not be predicted since the stock market has never received such an influx of funds as it would if the nation began to invest on such a large scale.

Whatever the nation decides, it is going to do in regard to Social Security, it must act soon. Only seventeen years remain before the trust funds begin to run a deficit, and if something drastic is not done before this time there is no way that the system will be saved. When it was originally implemented, Social Security was meant to be a "cushion" to supplement retirement income, but in recent decades it has become a major source of income for retired citizens. The nation will either have to resign itself to the fact that individuals cannot count on this system in a few years and will have to save for their retirement, or it will have to find a way to alter the system so it can handle the strain it soon faces. Both of these options will take a great deal of planning on the part of the United States government and its people.

Schobel, Bruce D. "Retirement Income in the United States: The Role of Social Security." New York Life Life Insurance Education Center: Planning For Your Retirement. 1998.

Tanner, Michael. "Social Security: Solvency Isn't the Only Issue." CATO. December 27, 1996.

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