As I write this, the proposal to "privatize" Social Security changes daily. With all the press this issue is receiving, many of you may be concerned about how it could affect you, now and in the future.
Background
On February 1, 2005, The Wall Street Journal reported that in 1960
there were five workers for every Social Security beneficiary. Today
there are slightly more than three. In thirty years there will be two.
If tax rates and benefits remain as they are under the current law,
the Social Security system will begin paying out more than it
collects in 2018. Actuaries estimate that, if changes are not made,
benefits will have to be cut 30% in 2042 to maintain the system.
Why the urgency?
Although Social Security can pay promised benefits for many years,
workers need time to save more if benefits will be cut and notice if
the retirement age is going to change. The longer the government
delays, the bigger the tax increases or benefit cuts will be.
What is the private account option?
President Bush is proposing "private accounts." Under his plan:
Would private accounts stabilize
Social Security?
In the short run, the government would have to find $1 trillion to
$2 trillion over the next 10 years (to replace tax revenues diverted
to private accounts) to pay current retirees. Over the long run,
private accounts are a wash. Diverting payroll taxes to private
accounts would reduce the flow of tax money into the system in
exchange for reducing government benefits for workers with
private accounts. Therefore, private accounts will not fix Social
Security's financing problems; other measures will have to be taken.
How do we stabilize Social Security?
There are a several basic ways to stabilize the system:
Who will be affected?
Current retirees and those over 55 — Under the commission's plan, only those under 55 will be eligible for private accounts. For current retirees and those 55 and older, there is no change to the current system. However, some proposals would change the costof- living adjustments to Social Security benefits, which could impact this group. People who are planning to retire within the next five years will want to watch this issue closely, particularly as they determine their retirement spending levels.
Younger workers — The bulk of the changes proposed will affect this group. It is likely that they will pay more into the system while working and may receive less guaranteed benefits in retirement. This makes it more important than ever for people to start planning early.
Conclusion
It will be some time before a clear picture of the changes (if any) to
the Social Security system emerges and before changes are
implemented. There is no reason to believe that the system will go
away, and currently the worst-case scenario is that benefits will be
cut 30% in 2042. We will keep you updated on the changes and
their impact on your retirement.
