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Wake Up and Smell the Coffee: Experts say Gen Xers should trade in their journals for a stock portfolio, unless they don't mind being broke in retirement.

Photo by Janet Orsi


Restringing the safety net

By Elizabeth Barrett

I DON'T EXPECT IT to be there for me when we retire," says 25-year-old Tom Lamoureux. "It" refers to Social Security; "we" refers to his generation; and the sentiment as a whole is one that can be found throughout Generation X. Social Security is breaking, and no one knows what to do about it.

Enacted in 1935 by President Roosevelt, Social Security was envisioned as a tool to be used to buffer the effects of old age, a tool that would help smooth out the peaks and valleys of an unstable economy. Sixty-two years later, that vision has become an integral part of your grandparents' well-being, of your parents' well-being, of your own well-being. But, given the state of Social Security today, the young workforce wonders if this social safety net really will be around when today's college graduates become tomorrow's senior citizens.

It's not something that the average 25-year-old contemplates, and it is for just that reason that experts say the average 25-year-old must begin to plan for his or her future. "I don't think people our age think about retirement, but if anybody should be forced to think about retirement early, it's us," states Lamoureux.

Although not apparent to all young people, it has been known for years now that the system on which so many depend is in financial straits. This means that the future of the 95 percent of the American workforce who are covered by the program is uncertain. And that uncertainty arises from the way the program and its trust funds were designed.

Social Security and Medicare (a part of Social Security since 1965) monies are distributed among four trust funds. So, with all of these "trust funds," why does Social Security operate on a pay-as-you-go basis?

As it stands, the paycheck that my grandparents receive does not come from the "trust fund," per se, but from my paycheck. And yours. The Social Security Administration takes its allotment of our paychecks and puts it into three of the four Social Security funds. The benefits that are received by the elderly, disabled, etc., are taken from the interest made by our Social Security deposits. Because the system works this way, a "minimum floor of benefits" is attainable by all. Low-income retirees receive the same benefits that high-income retirees receive. This is the redistributive nature of the program.

"The emphasis was more on social adequacy than equity," says John Fitzgerald, professor of finance at Ball State University. And, as long as there are more people paying into the system than are receiving benefits, the system works. "When the Social Security Program began in the 1930s, there were 16 people for every one beneficiary. Now I think the numbers are around 2.9. It's projected that the numbers are down to 2.5 people for every beneficiary coming up after the year 2000," states Fitzgerald.

And when the baby boomers become the new elderly in a rapidly approaching future, the numbers will be even worse. Once the number of people paying in is exceeded by the number of people taking out, we will begin to draw on the principal. And when that's gone, that's it. It is true that as long as there are people working, there will be income for the funds, but the baby-boomer generation is big--too big to be solely supported by the present non-boomer population. Plus people are living longer and are doing so with the help of expensive technology, so one sees that the equation can't be balanced. The Social Security dollar has to stretch farther to simply keep people alive.

The statistics and the time frames figured by the Advisory Council on Social Security are appalling: In 2012, the Social Security trust funds are expected to start paying out more in annual benefits than they collect in payroll and income taxes. Beginning in 2029, if the administration and Congress don't make further changes, the system will not be able pay full benefits. The Federal Disability Trust Fund is projected to be exhausted by 2016. And Medicare and its social counterpart, Medicaid, are struggling to make it through the first years of the new millennium. This means that if big changes aren't implemented soon, by the time Generation X retires, Social Security will be a distant memory.

Some firmly oppose the idea of privatization--an alternative that proposes taking retirement out of the hands of Social Security and putting it into the hands of personal, individually chosen, government-approved retirement accounts. Others see government-supervised privatization as the way to go, holding up the Chilean system as an example of privatization at work.

Social Security involves two things that no government agency and no elected official want to touch: taxes; and the largest voting block in the nation--the elderly. To stymie the cancer that has hold of this program, taxes have to go up or benefits have to go down. Either way, the public loses.

"It's what you'd call a political hot potato. Nobody wants to tackle it. It's such a big problem because you can't come up with a solution that's going to make everybody happy. There's going to be some pain," Fitzgerald says. "Are you going to inflict the pain on the people who are just coming under Social Security now, or are you going to inflict it on the ones who say, 'Look, I've paid into Social Security for years, I'm getting ready to retire. Now you're going to cut my benefits?'"

But the fight continues. On the national level, the Senate recently voted to gradually raise the national retirement age from 65 to 67, and President Clinton has called for legislators to pass a reform that will increase the Medicare premiums for well-to-do seniors. And by staggering the payment period over the course of the month, a change that took effect on May 1 of this year, there is no longer a monthly peak program expenditure. Additionally, by Jan. 1, 1999, all Social Security benefits will be administered through direct deposit, saving taxpayers $8.9 million a month.

THESE CHANGES, though well-intentioned, do not change the simple fact that there are more baby boomers than there are men and women to support them. But even then, Lamoureux is optimistic. "The baby boomers will set a new standard, as they do for everything. I don't think people will stop working; they'll just work less. Retirement isn't what it used to be."

Of course, this doesn't change the fact that there are, and will be, elderly who are simply not able to continue working. What will happen to them?

It is obvious that a complete system overhaul will have to take place. The problem is, there is no way to overhaul such a vast system without causing some pain. Some propose privatization, but privatization, as it has been theorized thus far, cannot guarantee a minimum level of benefits for all without resorting to a welfare-esque model, nor can it guarantee disability or survivor insurance. And then, what about Medicare?

Professor Fitzgerald offers this advice: "Concentrate on your own individual retirement plan; company pension, if your company has a pension plan; 401K plan--something separate, because the whole theory of Social Security was like a triangle. One leg of the triangle was Social Security. Another leg of the triangle was the employer-paid pension plans, and the third leg was personal savings. A lot of people forget about those second two legs. Be vocal. Make sure your voice is heard, but don't overlook personal retirement and financial planning."

Fitzgerald also recommends that today's young people investigate private life insurance (the public benefit provided by Social Security takes the form of Survivor's Insurance) and your company's disability income plan (the equivalent of Social Security's Federal Disability Insurance).

If your company does not have such a plan, look into personal disability income insurance. Unless we can come up with something better, Social Security is our problem and we'll have to resolve it. If we don't, it'll resolve itself, leaving millions out in the cold.

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From the Oct. 9-15, 1997 issue of the Sonoma County Independent.

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