Social Security Solution Obvious

Predicting how the economy will behave in the 21st century is a job for fortunetellers, not economists. Forecasting where inflation, productivity or unemployment will be 20 years from now would require a crystal ball, not a doctorate.

But one major economic question can be answered today without conjecture or a Ouija board: The Social Security system will be bankrupt in two decades.

This is a certainty because we can count how many people were born during the baby boom years of 1946 to 1964 - about 76 million - and see that this huge group will begin hitting retirement age in just 16 years.

We also know most of these people will enjoy long lives because of improved medical care. In 2050, 100th birthday parties will be routine.

Finally, we know boomers have been producing fewer children than previous generations. As a result, the population mix of young-to-old will shift dramatically. In 1950, the country had 16 people working for every one drawing Social Security benefits. By 1990, the ratio was 3-1. It will slip below 2-1 in about 35 years.

These three facts mean Social Security is guaranteed to go broke even before most boomers reach their mid-60s. We are tied to the train tracks and can see the locomotive coming around the bend. The only question is whether we will loosen the ropes or wait quietly for the calamity.

Surprisingly, the way to escape this disaster is as clear as the problem itself. Working Americans can spend less income on Social Security, and still get more benefits in retirement, if we restructure the system to benefit from compounded earnings, held in private accounts and managed by professionals.

As it stands today, our national pension system fails to take advantage of compounded growth. Instead of allowing our money to grow over time by investing in stocks, the government simply takes cash out of our paychecks and hands it over to retirees.

This pay-as-you-go system works well when workers greatly outnumber retirees, as has been the case over the past 60 years. Even today, workers generate enough income to support retirees and create annual surpluses.

But in a few years, the balance will shift as wave after wave of boomers retires. The workers of tomorrow will have to surrender nearly all their earnings to keep the system solvent.

The only answer is to take money out of today’s paychecks and set it aside in accounts handled by private money managers. That way, future retirees will not be counting on their children’s money for Social Security. They’ll be relying on their own cash, compounded over decades.

This is not an untested scheme. The system is working today in Chile. In 1981, the South American country shifted from a pay-as-you-go plan to mandatory, individual retirement accounts. The result: Chileans have amassed $25 billion in savings and the net worth of the average Chilean has risen to four times his annual salary. The average American has a net worth equal to only one year’s pay.

This system is called “two-tier” because workers are required to invest part of their income in retirement accounts and give another chunk to the government to operate a social safety net for the truly poor.

But how do we move from the pay-as-you-go system without hurting today’s retirees or raising payroll deductions? Sam Beard, chairman of the New York-based National Development Council, addresses that in a book coming out soon, “The Social Security Solution.”

His transition plan includes these features:

Raise the retirement age to 70, phasing in the change by 2029.

Start splitting payroll deductions into two piles now while workers are still running surpluses in Social Security. One pile would go to maintaining the existing Social Security system and the other would start moving into private accounts.

Create “liberty bonds” - voluntary, 30-year interest-paying bonds. Wealthy retirees who don’t need immediate Social Security payments could bundle their retirement savings into these tax-free instruments and leave them to their children. That would reduce the burden on the system today, while still giving Social Security benefits to all who earned them.

His plan makes sense, but only if the changes can be made now while there is still time for boomers to benefit from compounded earnings. Delaying even a few years will make the private system unworkable.

The train’s whistle is sounding - we’ve got to get to work on these ropes. xxxx

This sidebar appeared with the story: A FIX FOR SOCIAL SECURITY A two-tier retirement system could work in this country too if it had three important features: It must be mandatory for all income-earners. The government must maintain a safety net for those who never earn enough to generate a retirement income. And the government is required to monitor the money managers to weed out crooks.