Social Security Reform, and the "Average Family"

While Social Security is by far the most popular government program, it's in serious financial trouble.

Social Security is a pay-as-you-go system, meaning taxes from today's workers pay for the benefits of today's retirees. Unfortunately, the ratio of workers to retirees is shrinking. So much so, that by 2015, the payroll tax won't take in enough revenue to pay benefits already promised. That's when the so-called trust fund is supposed to make up the difference, by cashing in IOUs it's been writing to itself, by either raising taxes or borrowing more money. But even that won't work forever.

For this reason, Social Security reform is a top priority. With GOP presidential candidate George W. Bush wanting to allow workers to invest a small portion of their payroll tax dollars in the private capital market, and Democratic candidate Al Gore demanding the program be left alone, we are bound to hear charges and counter charges about what is riskier: market reforms or doing nothing?

Therefore, it's important for each generation to understand what reform really means to them. To illustrate this point, let's look at the effects of reform on members of the "Average family," using a benefits calculator available on the NCPA's website (

Meet Joe Average, a 75-year-old widower and retired steelworker. While the money he receives every month from Social Security is barely enough to live on, he doesn't want to hear any talk of messing with the system and possibly having his benefits reduced.

Good news. Nothing is going to happen to his benefits, no matter what the politicians do. Every single proposed reform, including all plans that feature some aspect of private retirement accounts, guarantees that the promises made to current beneficiaries will be kept. He will continue to get his check as promised. That means that Joe has nothing to lose from any reform proposal.

What about Joe Average, Jr.? Junior is a 51-year-old electrician. If Social Security is not reformed, when he retires at age 66, he and his wife can expect to get a monthly Social Security check of about $2,000. That's about 25 cents out of every dollar he paid in payroll taxes. If, on the other hand, he had controlled the money the government had taken from his paycheck, and had chosen to invest it in a private account like a 401(k) or an IRA, he could have had almost $7,300 a month. That's assuming it was invested conservatively, which all of the proposals ensure.

Now, if we were to give workers this choice and control today, Junior probably wouldn't earn enough for a $7,300 a month benefit, but it wouldn't be as low as $2,000 either. Instead, he would get credit for the time he paid into the current system and would have the opportunity to benefit from nearly 15 years of investing his money in real assets.

Also, under every current reform proposal, retirees are guaranteed to receive at least what they're currently promised, no matter how poorly their investments do. Therefore, Junior has the security of knowing he can't lose anything, and also has the opportunity to improve his fortunes. And his family gains some measure of security as well, unlike today, since his personal account becomes part of his estate, which could then be passed on to his wife or daughter when he dies. Currently, his wife will only get two-thirds of what the two of them were receiving and his daughter will get nothing since she's over age 18.

Speaking of their daughter, she, like the rest of Generation X, has no faith that she'll see anything from Social Security. And if nothing is done, she's probably right.

Right now, Joanna, a single 27-year-old registered nurse, is promised a monthly Social Security check starting in the year 2040 of slightly over $1,700 in today's dollars. But to pay that, the payroll tax will have to increase 12.65 percentage points to 27.95 percent. That's arguably an uncollectable rate, and therefore a promise that can't be kept.

If Joanna were given control over her own money, she could have benefits four times as large, and the system would be funding itself, instead of relying on the generosity of future workers. In other words, she risks everything by doing nothing. But with choice and control over her own money, Social Security could be saved while providing her with a more secure and prosperous retirement.