David Gallo. In back: Shannon Clundt, Holly Spurlock, Brendan Welsh, and
Scott Baldwin. Seated: Joshua Neves, Conor McNerney,and Adriana Tirri.
Not pictured: Peter LeDuc.
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Honors Economics students discuss Social Security with their teacher,
David Gallo. In back: Shannon Clundt, Holly Spurlock, Brendan Welsh, and Scott Baldwin. Seated: Joshua Neves, Conor McNerney,and Adriana Tirri. Not pictured: Peter LeDuc. |
The students' solution distributes the pain of cuts across the population and over time. All of their calculations were based on figures provided by the Social Security Administration. The following is a summary of their findings.
Social Security: The Generational Fix
Information in the media has led most of us to believe that the current Social Security system is on its way to failure. However, this need not be the case. By making a few minor adjustments to the system now, Social Security can continue to pay out what hard-working Americans have paid into the system since 1933.
Current Situation Until 2013, the taxes paid into the system will exceed the benefits paid out, thus increasing the balance on the Trust Fund. Between 2013 and 2029, the benefits paid out will exceed the taxes paid into the system. In 2029, the Trust Fund balance will equal zero. From then on, benefit receivers will take a drastic 30 percent cut, in order for the system to stay afloat.
Problem Solution In order to solve the problem, we need to do two things: 1) invest a portion of the Trust Fund in a manner that yields a higher rate of return; 2) slow benefit growth. These two steps must be implemented together. Currently, the Trust Fund receives a much lower interest rate from the government than could be earned by low-risk investment in the stock market. Despite crashes, fluctuations, and short-term unpredictability, investment in the United States' stock market has yielded an average rate of return of 10.7 percent annually since 1926. We have found that investing in equities and bonds will prolong the life of the Trust Fund and, coupled with cuts in the growth of benefit, could solve the problem.
By investing 40 percent of the Trust Fund in equities and 60 percent in bonds, which would yield approximately an 8 percent return, the Fund will last until 2036. By investing 60 percent in equities and 40% in bonds, which would yield approximately a 9 percent return, the Fund could be prolonged until 2040. Eight or 9 percent interest compounded (as opposed to the 6 or 6.5 interest rate projected by the SSA) will produces a dramatic change.
Cutting the Growth Rate The benefit growth rate must be cut by either adjusting the Consumer Price Index to reflect more accurately the true rate of inflation, by raising the age of retirement to accommodate longer life expectancies, or both.
Benefit growth rate need only be reduced by a fraction of a percent if it is done immediately. By spreading the solution of the problem over generations, the resulting decrease is so small that no one is significantly hurt by it.
Privatization Privatization is not a solution, but rather an unnecessary shift of responsibility from the government to the individual. It would be unfair to ask that private investors could earn more than 9 percent returns without risking what, for many, is the only source of income after retirement.
"Ultimately, taxes are going to be raised or benefits will be cut. There is no way to get around it," argues Sylvester Schieber, a member of the Social Security Advisory Council. Since these changes are inevitable, it is imperative to share the responsibility now, so that huge benefit cuts will not be necessary in the future.
KM