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Friday, May 22nd, 2015


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What Students Should Know About Social Security

Frustration, rolling eyes, and channel changing are most college students’ response to President Bush when he interrupts their nightly TV-watching regimen. But if they channel surfed during the State of the Union Address in February, they would have missed something important.

Social Security is facing a long term deficit of $3.8 trillion. Unless something is done to close this deficit, today’s college students will see fewer benefits at retirement.

The problem is due, in part, to demographics. Currently, the system is in a surplus; because the Baby Boomer generation is so large, there is more money coming in than going out. By 2017 when Boomers are retiring, it will be the opposite and the imbalance will cause it to become insolvent around 2041– just before recent grads retire.

Social Security reform has started a debate among politicians and financial experts, but not college students. This is unfortunate since they will be most affected and could lose benefits.

"Knowing that there is a chance I am not going to see many benefits makes me not want to pay into the system," said Alyson Platkin, 22, student at Northeastern University. "I don’t think it is fair to have to pay for something I am not going to get any use of."

If there is no reform, Americans retiring after 2041 will still receive benefits, just 26% less than promised. Reforming the system to incorporate private accounts is one way to offset that decrease.

The plan being embraced by President Bush, progressive indexing, was developed by Robert Pozen, chairman of MFS Investment Management in Boston, and a member of President Bush’s Commission to Strengthen Social Security in 2001 and 2002.

Progressive indexing would maintain benefits promised to low wage workers while reducing the growth of future benefits for middle-and high-wage workers, causing critics to condemn the idea.

"Once there is a schedule of benefits, even if the schedule is entirely unrealistic and we can’t finance it, it becomes a built in expectation that somehow everyone is entitled to that schedule," said Pozen. "There is no legal entitlement to the schedule, especially if we can’t afford it. And we can’t afford it by about 4 trillion dollars."

Today, benefits for retirees are based on wage indexing, or the percentage wages increased over time. Pozen has proposed middle-wage earners’ benefits be based on a combination of price indexing—the rate of inflation—and wage indexing. High-wage earners’ benefits would be tied to the rate of inflation only, which is lower than that of wage increases.

Middle-and high-income earners have additional retirement programs (IRA and 401k) and can afford slower growth in benefits, Pozen says. As a political "sweetener" the reform program would allow middle-and high-wage earners to put a portion of their income into private accounts, balancing the benefit cut. Pozen predicts his plan will reduce the deficit by 70%.

Many argue it’s dangerous to assume workers will set up private accounts. But, an even more dangerous assumption is that every American will properly plan for retirement. Low-wage workers are likely to depend solely on Social Security, which makes it especially important to deliver promised benefits.

Pozen was smart enough to come up with a solution; however this doesn’t mean that policy makers will do anything about it.

"Partisan politics are surely not helpful to Social Security reform," he said. "Reform needs to happen now while we have a second term president. Waiting until 2012 (when Baby Boomers are retiring), could be too late."

Social Security is a safety net. Additional money will be needed to supplement benefits, so start preparing. Start a savings account. Normal banks may not provide the best interest rates so other options to look at include interest-bearing accounts, CDs, and working with investment firms that offer different saving products. Begin to save while you are young and have time to accumulate money and recover from investment losses.

Regardless of your political affiliation or opinion on reform, take a stand. Write a letter to your congressmen and encourage professors to discuss the issue in class. The more this generation knows about Social Security reform, the more influential it will be in getting the problem resolved.

© 2008, Young Money Media, LLC. All rights reserved.

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