Social Security is a real problem and we need to fix it and that involves pain” says Jeffrey Brown. Brown, an assistant professor of finance at the University of Illinois College of Commerce and Business Administration, says Republicans and Democrats are both guilty of exaggeration when debating Social Security reform and American citizens are and will pay the price for the myth building.
At the core, Brown says there are two big myths. One is that Social Security is fine and won’t run out of money. The other is that personal accounts are a free lunch; they can save Social Security from going bankrupt as well as help Americans salt away enough money for a secure retirement. But those are just myths, says Brown.
Myth 1: Social Security is financially sound for decades to come
The Social Security Trust fund is projected to have sufficient resources to pay full retirement benefits through the year 2041. The truth, however, is that Social Security is not on solid footing for decades to come.
Baby boomers, some 77 million people, will start claiming benefits as early as 2008. And given that Social Security is a pay-as-you-go system, its cash-flow surpluses will start declining then.
“This pressure will necessitate significant changes to the Social Security system and/or the rest of the federal budget, possibly including spending cuts, tax hikes or increased borrowing,” he says. “To argue that we can ignore the problem for several decades simply because we have an accounting balance in the Trust Fund is fiscally and economically irresponsible.”
Myth 2: Personal accounts can save Social Security without benefit cuts or tax increases
The financial problem facing Social Security is simply this: you can’t sustain a pay-as-you-go system in the face of a declining worker-to-beneficiary ratio.
“The simple economic and mathematical reality is that there is no easy, cost-less or “pain-free” solution to the problem.”
Proponents of personal accounts have argued that if we divert existing tax revenue to personal accounts we can have a free lunch.
The only problem with this approach? “It is not true,” he says. “If it were possible to provide guaranteed benefits that are higher than today’s promised benefits with no tax increases, then every single Republican politician, economist and policy analyst, as well as most Democrats, would be falling over themselves in a rush to sign on.”
“Many policies alone or in combination make economic sense,” he says. But “we will need to fix the lion’s share of Social Security’s problems by reducing the rate of growth of benefits,” he says.
“We shouldn’t kick the problem down the road for 10 years for others to deal with it nor should we pursue policies that don’t fix the problem but appear to,” he says. “There are no easy solutions. Someone’s ox must be gored. We either need more revenue or to pay less out of the system. People either don’t understand that or they choose to ignore it.”
Even the optimistic projections on Social Security don’t have it around for the time when I retire. So, I’m hoping for changes and not expecting anything.