Don’t touch the third rail

Don’t touch the third rail

September 4, 2015

It’s the third rail of politics. Touch it and you die. If you aren’t familiar with this reference, its about Social Security. Before any discussion of Social Security is initiated, the context of its creation should be considered. Passed by President Franklin Delano Roosevelt in 1935 as part of the New Deal, Social Security was an idea to combat poverty and unemployment due to increasing age and inability to work. It was the middle of the Great Depression, people were unemployed, homeless and hungry. Social Security was created to try and ease the burden for the elderly who were not able to weather these times and who only had their usually meager savings to help them.

Two key elements of Social Security were defined. The retirement age was set at 65 and everyone was enrolled. Funded through a payroll tax system, people’s income in addition to businesses would be taxed. Once one reached the retirement age they would be allowed to collect benefits, part of what they had paid in over their working life. The reason to impose this tax on everyone was to avoid a vicious cycle and to ensure that everyone would have at least a basic plan for the future. In this manner, everyone would have access to an income once they retired and the financial burden of living without an income would not be as pressing. By passing the Social Security Act, people would contribute to their own retirement without having to manage accounts or actively take action. It was and still is an elegant solution.

Of course, now there’s just one problem: The trust fund ran out. And not recently. It’s been empty for quite awhile. The simplest explanation is that people who pay the tax now are paying the current elderly population and so the money they put in isn’t being saved for them but rather being spent. When generational gaps form, a dichotomy arises between the amount of workers and retirees leading to an unbalance. More retirees than workers means less money in and more money out. For example, the 76 billion retired baby boomers is one of the largest groups ever to retire and there are not enough people to compensate for the difference.

The next question we face becomes when will the fund truly run out of money. The Department of Social Security predicts that by 2034, the coffers will be empty. For all the students reading this, we will be approaching 40, still a far cry off from 65. Perhaps this is why 51 percent of non-retired Americans believe they will not see their paycheck. Since 1998, the percentage of Americans who think that Social Security is in a state of crisis or has major problems has stayed above the 66 percent level. Not very promising. This is relevant since 36 percent of non-retirees believe Social Security will be the major source of income once they retire and another 48 percent say it will be a minor source. Combined that produces 84 percent of non-retirees who are saying Social Security will be important in their retirement. The final kicker is this: people are retiring earlier, and this has two implications. The first is a bigger drain on Social Security. The second, less money going in. And this at a time when people are living far longer.

When first passed, the retirement age was set at 65 for one very specific reason. In 1935 the life expectancy of the average person was 61 and by using the age 65, the system could be self sustaining because not everyone who paid in would live to get back their benefits. This meant that for people to collect benefits, they would have to beat the odds by at least 4 years to collect Social Security. More people would pay into the fund than who would receive benefits and this difference is what allowed Social Security to work effectively. But a lot has changed since 1935. Life expectancy in the United States has risen by 18 years since 1935. How much has the retirement age increased to match this change? None. No wonder the fund is running out of money. I sit writing this article knowing that once I graduate, I will have to work for at least the next 45 years of my life. Retiring at 65 is not practical and conducive to being able to support my future family, and to ensure that I will be safe and financially secure for the rest of my life.

The only solutions to this issue are to either raise the retirement age or cut benefits. Two outcomes that always produce outrage and shock. I believe some combination of the two must be enacted, otherwise the entire system will break, and it will be the elderly who suffer. Can people really retire earlier and earlier while we live longer and longer? Should we expect that people rely on Social Security from 65 until 79 or longer (14+ years’ worth of income) when the founder of the program knew providing benefits for such a protracted period was impossible? Is it right to pass the buck on this issue simply because it will upset parts of the population, when the entire program is at stake? It’s better to cut the off the arm and save the patient then to watch as he wastes away.

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