Social Security--The Problem

Why Social Security is in Trouble

The Problem

• Social Security is an "unfunded" income transfer scheme—the benefits paid out to retirees are financed by taxing the current income of working people.
• It is not a "funded" approach, where an individual's taxes would be invested, and the proceeds used to provide their retirement benefits (like an IRA or a 401k).
• This system worked for decades because there were many workers and few beneficiaries—16 to 1 when the program started.
• Because of declining birth rates and increased life expectancy, there are now only 3 workers for each beneficiary, and soon there will be only 2. The system will not be able to support itself with so few workers to pay for so many beneficiaries.
• According to the best estimates, the Social Security system will go into the red in 2017—just over a decade from now.
• In 2041, less than 25 years later, it will be completely out of money.
• If we continue under the current system, the only way to address this problem is to either cut Social Security benefits or raise payroll taxes. But even these will only put off the problem, not solve it.

The Solution

• The only way to permanently strengthen Social Security is to transform the system into a program with real savings to back its promises to future retirees.
• The best way to do this is with a personal account component as President Bush and others have proposed.
• But it is vitally important to protect the benefits of current and near-future retirees.