Guest Author - Linda Sue Grimes
According to President George W. Bush, in 1950 there were sixteen workers supporting each beneficiary of Social Security. Today, only three workers are supporting each beneficiary, and by the time the youngest workers of today reach age 65, there will be only one worker contributing to each beneficiary.
This erosion of benefits means that today’s thirty-year-old worker will experience a 27% cut in benefits at retirement. Only twelve years from now the government will begin to pay out more in retirement benefits than it collects. By 2027 the government will need to have $200 billion a year to keep Social Security solvent, and by 2041 the system will be bankrupt.
What Happened to FDR’s System?
Originally, Franklin D. Roosevelt offered a plan to help senior citizens face retirement with dignity. The plan included three provisions
1. Old Age Pensions – state-run welfare programs for the elderly.
2. Mandatory Old Age Annuities – essentially the system we have now
3. Voluntary Old Age Annuities – certificates sold by the government
Roosevelt and the Committee on Economic Security developed the idea of voluntary annuities to cover those workers who were not covered by the mandatory provision and also for those who were covered but wanted additional income with their regular benefits. The Congress did not pass or even consider the third provision. FDR continued to call for its passage, but he did not press hard enough to get it done.
FDR intended for the voluntary annuities to eventually take the place of the other two provisions: “It is proposed that the Federal Government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans.”
Voluntary Old Age Annuities
The Voluntary Old Age Annuities was scrapped and the government continued picking up the tab for retirement benefits. This system worked well because the population continued to grow at a pace that more younger workers were paying to support a smaller population of older retirees. During the 1940s after the end of World War II, the United States experienced a population explosion, popularly called the “Baby Boom.”
With a robust economy during and after the war, there had been enough workers to support the retiring older but smaller generation. Now while those “baby boomers” will be retiring in just three years, the country is experiencing a drop in contributors. And as the president has said, people born in 1950 and earlier will be able retire with full benefits, but the situation gets worse and worse as more and more “baby boomers” continue to retire, while depending on a less populace work force.
Solutions Still Evade Government
While there are no perfect solutions to solve the Social Security problem at this time, President Bush suggests that the best plan is voluntary personal accounts, a plan that harkens back to FDR’s original idea. However, unlike the government sponsored voluntary annuities of FDR’s plan, the plan now offered by President Bush calls for younger workers to be able to voluntarily take a portion of their Social Security taxes to purchase a “mix of bond and stock funds that would have the opportunity to earn a higher rate of return than anything the current system could provide.”
The idea is similar to FDR’s in that it is voluntary, but by taking the provision out of government’s hands, the younger workers would become true owners of their money. It is estimated that a young worker earning $35,000 per year could accumulate a quarter of a million dollars with a voluntary personal account by retirement age.
Presidents struggle to get new ideas accepted. FDR struggled to get his version of Social Security passed; it is clear that he hoped the system would become voluntary as more people realized the good sense of saving for their own retirement. Now President Bush’s plan offers a similar template, a plan that would eventually demonstrate that ownership of one’s own money makes more sense than government’s stewardship of the same money.
For more information:
The Roosevelt Administration's Proposal for Voluntary Annuities
Strengthening Social Security
