Social Security shortage to affect generation Y

By Christina Williams
April 14, 2005

Jess Webb / Photo Editor

President George W. Bush is trying to sell the idea of privatized accounts for Social Security to non-baby boomers as a means of income in order to be prepared for the inevitable Social Security shortage.

There has been a huge debate as to where Social Security will be in the next five to 10 years. Presently, the president says that the Social Security trust fund will go bankrupt and there will not be enough money to support those who come after the baby-boomer generation.

Bush has come up with what he feels is the answer to the Social Security shortage. Bush suggests that younger generations should start private accounts in order to save money that they can have access to when they are ready to retire.

All employed citizens pay into Social Security, however, there is no bank account for each individual that contributes Social Security funds. Instead, the money goes into one Social Security pot.

The problem stems from the trust fund, which has forced Social Security to run into a surplus. The money from the surplus is helping the government fund the military, education programs and tax cuts.

In a few years, there will be major changes that could potentially affect the trust fund. In about 2018, more money will be taken out than is brought in and the government will have to look towards outside sources to cover the money they used from the trust fund.

The dwindling status of the trust fund is the key point to Bush’s plan for private accounts. The idea of there not being Social Security is incentive for today’s generation to open private accounts.

In the end, those who choose to start private accounts will be able to keep that money for themselves after they retire. But by diverting money into private accounts, America will further deflate the Social Security fund.

These seemingly effective accounts have a downside as well. The only way private accounts will benefit those who decide to have them will be if the economy greatly improves.

With the economy still struggling, if private accounts were in effect, most people would be losing money. A person with a private account in today’s economy would be taking in less money than a person who did not have a private account and was collecting money from Social Security.

What Bush is not telling Americans is that these privatized accounts will only work if the economy improves. Bush is using the idea of “private accounts” to appeal to young people since many think Social Security, the way it is now, will not be around for them.

However, as long as the war continues and the deficit grows, these private accounts may not be the answer. On the other hand, if Bush can figure out a way to strengthen the economy, private accounts could be a beneficial plan.

Currently, working Americans loose 6.2 percent of his or her paycheck to Social Security. If a person opens a private account, 4 percent out of that 6.2 percent will go to their private account and the other 2.2 percent will go to the Social Security pot since some will opt not to have a private account.

Financial advisers warn that if the economy does not change from its current state, those who have private accounts will not profit when they choose to retire. If the economy gets better than it is now, those with private accounts will get approximately $5,000 extra; however, if the economy gets worse, those with private accounts will loose approximately $2,000 dollars.

Dr. Jim Hedtke, a professor of history and political science, feels as though Bush is treating Social Security much like the present situation in Iraq. Hedtke said, “We just don’t know about certain parts of the plan. It’s like Iraq; we’re getting false information.

Hedtke also thinks that Bush is trying to make large changes too quickly, which could cause problems. Hedtke said, “If you tinker with Social Security and mess it up it is a deathblow” Hedtke said.

When Hedtke says that there will be a “deathblow” he means with Social Security and politically as well. Political analysts say that if Republicans fix the Social Security problem, then Democrats will no longer be able to use Social Security as a platform.

President Bush is optimistic, saying there are other options to fixing social security to ensure that those who come after the baby boomers receive retirement money.

One option is to increase the payroll tax from today’s 12.4 percent to 13.9 percent. Raising the payroll tax could make a large dent since more money would be put into the pot for later.

A second option would be to raise the annual cap on the amount of income subject to Social Security. Right now, those who make $90,000 and up pay one flat fee into the Social Security fund. If the cap is raised, then those who make $100,000 would pay more into the fund, this would temporarily improve the situation.

Dr. Mary Harris, an associate professor of business administration, says there are other options to these two popular ideas. Harris says the other two options would be to either increase the age of retirement or a deduction in benefits being paid out.

Harris is not a firm supporter of Bush’s plan for private accounts. She explained that Social Security was originally set up during the depression to provide money for those who were retired or widowed and force those who were working to set money aside for their retirement. Harris continued to say that there was never an intention to establish Social Security to provide money to keep those who are retired in a certain standard of living.

Harris says private accounts are not the answer because people could invest incorrectly and lose everything and people cannot live off just Social Security. Harris says that the reason there are 401K plans and corporate pension plans is so that people can receive money from another source along with Social Security, but Social Security alone is not enough to survive on.

There are so many unknowns as of right now and one of the biggest being the future status of the trust fund when the baby boomers start to retire. Will there be any money left for generation Y? Financial advisers strongly believe that if the government does not reform Social Security soon there may not be enough for those considering about retirement in 2042.

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Posted to the web by Ryan Norris

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Christina Williams

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