Is reform needed? page 1, 2, 3
In an effort to create a sense of urgency for Social Security reform, a lot of people talk about how the Social Security Trust Fund will be exhausted in 2034. This is true, assuming current economic projections are accurate, but misleading. Social Security is a pay-as-you-go system. The money paid by today's workers is used to pay benefits to today's Social Security recipients. Right now, there is more money coming in than is going out. This is the "Trust Fund" that people talk about; money that is being "stockpiled" for when baby-boomers start to retire - because when that happens, there will be more money going out than will be coming in. In approximately 2014, we will need to start tapping that "stockpile" to pay for boomer retirement benefits. If nothing changes, the stockpile will indeed be all used up by approximately 2034. But, the money coming in at that time will still be enough to fund about 75 percent of the benefits that will be payable at that time. However, as we've seen from the examples above, many retirees - especially women - are barely making ends meet with the current level of benefits. Seventy-five percent simply is not going to cut it. So, yes, some changes do need to be made.
The current system, with all its faults, is still better than the "privatization" proposals being floated by reformers, and supported in theory by George W. Bush. As it exists now, the Social Security structure has three benefits that are not likely to be included in any privatized system: It pays a benefit to women who have spent their lives doing the unpaid work of wives and mothers; it pays a guaranteed benefit for life; and it is adjusted for inflation. A fourth provision affects the growing numbers of marriages that end in divorce: Any (and all) divorced spouses who were married more than 10 years are entitled to spousal and survivor's benefits based on their ex-spouse's Social Security account.
There are several different proposals to privatize Social Security, but all of them basically divert some or all of the Social Security tax paid by you and your employers into private retirement accounts, thereby taking them out of the "pay-as-you-go" system. The proposals differ on how to make up for the resulting shortfall in the "pay as you go" system. Some would raise the retirement age to 70, others would simply drain the current Trust Fund.
Once the funds are in the private account, the wage-earner has full control over those funds, and they are subject to all the vagaries that any other retirement fund is - stock market fluctuations, inflation, poor investment choices, or being used up before the owner dies. These factors are of concern to both men and women, but the proposals are even less attractive for women: Women generally make less than men, so they will have a smaller account, and they generally live longer, so they will need to stretch that smaller account further.
Under some of the privatization proposals, wives at home would be guaranteed nothing, because they have no earnings. Their benefits will, as now, be based on the account of their husbands, but that account will be subject to the investment acumen of their working spouses. Working wives would have their own accounts. But, again, the wage-gap would likely result in a smaller account. Even if they manage to accumulate the same amount of money, women would still probably get a lower monthly income from their accounts than men, because of their longer life expectancy.
It is unclear whether the plans being proposed would specify that a husband must turn his private account into a lifetime annuity for both him and his wife (thereby covering a wife who outlives him, which is what Social Security does). Without such a provision, and with full control of the account, he could use up the all the money before he dies. This is yet another item of special concern to divorced women, especially those who spent several years out of the workforce caring for children while their husbands were building up those "private" accounts.
Next Page: A better plan for women.