Editorials and Opinion Pieces

She just turned 25. Social Security will run short of funds to pay promised benefits by 2032, when Monica will be 59. To fund all her promised benefits would require raising payroll taxes by 50% - 100%. Today’s 12.4% payroll tax would have to be raised to 18% - 24%.

Congress will never enact such a huge tax increase, for both political and economic reasons. That means Monica will never get anywhere near the benefits Social Security now promises her. What’s worse is that even these promised benefits would be highly inadequate. Monica would be able to get much higher returns and benefits if she and her employers could pay into private, individual investment and insurance accounts instead.

Suppose Monica could pay into such an investment account, like a 401k, in place of Social Security. If she earned an average income all her life and earned a 4% real return on her investments, which is just over half the average return earned in the stock market over the last 75 years. She would reach retirement with a fund of about one-half million dollars ($491, 876), which would finance a lifetime annuity paying her about four times (3.91) what Social Security promises, but cannot pay. At a 6% real return, closer to stock market averages, she would reach retirement with about $850,000 ($855.583). This fund would finance an annuity paying her almost eight times (7.88) what Social Security promises her, but cannot pay.

Now should Monica marry a wonderful but economically average Joe who earns the average income each year for his entire career. Suppose also that they have 2 kids and basically become Republicans. If they could pay into the private account rather than Social Security, then at retirement they would have close to $1 million ($944,596). That fund would pay them more than Social Security promises out of the continuing returns alone while allowing them to leave the million dollars to their children. Or they could use the fund to buy an annuity paying them over 3 times (3.27) what Social Security promises but cannot pay. At a 6% real return, they would retire with a fund of about $1.6 million ($1,628,297), which would pay them 2.65 times what Social Security promises out of the continuing returns alone, leaving the $1.6 million to the children. Or it could finance an annuity paying them almost 6 times (5.87) what Social Security promises, but cannot pay.

Of course, Monica is a hot commodity and a smart young woman. So she’s more likely to earn at least the maximum taxable income for Social Security each year (which is about $68,000 this year). At that level, as a single person earning a 4% real return on the account investments, Monica would reach retirement with a fund of about $700,000 ($678,986), which would pay almost 5 times (4.69) what Social Security promises but cannot pay. At a 6% real return, still less then the average in the stock market, the fund would total $1.4 million, and pay her over 9 times (9.16) what Social Security promises. If Monica marries a hot shot young lawyer who also earns the maximum taxable income each year, then at retirement they would basically have double the above amounts, and better benefits than Social Security by the same margins as above.

On the other hand, if Social Security is not reformed to allow for such individual accounts, Monica will not only lose these much higher benefits. She will be burdened during her working years with much higher taxes to close the Social Security deficits, which the government’s own reports project will start in 2013, when Monica is 40.

Over the following 20 years, the Social Security trust funds will turn in about 2,5 trillion in government bonds to get the cash to keep paying Social Security benefits, until the trust fund runs out in 2032. But the government has no cash or other assets to pay off these bonds. It will most likely end up getting the cash by sharply raising taxes on Monica and her friends, by as much as $2.5 trillion over this period. That will ruin the economy for them, as well as destroy their personal finances.