After a final sip of eggnog and one last Christmas cookie, millions of American women have begun planning their New Year’s resolutions for 2005. Shedding extra pounds will undoubtedly be the most common vow — and probably the most commonly broken — but many will also focus on the equally worthy goal of getting personal finances in shape and starting to plan for retirement.
For many women, a December spending spree will have bloated an already hefty credit card debt. As the noted personal finance advisor Suzie Orman might say, getting out of debt is the first step to financial freedom. Yet this year, on top of the financial-freedom “to do” list must be to write your congressman. That’s because a looming policy battle over Social Security is certain to have a big impact on our pocketbooks and our retirements.
The President recently held an economic summit in Washington, D.C., to give Americans a preview of his domestic agenda for 2005. Saving Social Security was Bush’s top priority, and with good reason: The venerable program faces a looming financial crisis. The problem is that Social Security doesn’t save the money that you pay into the system for retirement; those taxes are used to pay for current retirees. This system may have been adequate in 1950, when 16 workers were paying into Social Security for each retiree, but today just over three workers support each person collecting checks. By 2050, only two workers will be paying for each retiree’s Social Security.
As a result of this demographic imbalance, Social Security will begin running a deficit in a little over ten years. The deficit will start small, but quickly spiral into a massive annual shortfall. In 40 years, when today’s young workers begin retiring, Social Security will be able to pay only about two-thirds of promised benefits. Those future retirees will either face drastically reduced benefits or the next generation of workers will see their payroll taxes rise by 50 percent.
President Bush wants to avert this unhappy outcome: He’s working with Congress to create a reform plan that puts Social Security on sound financial footing and gives all workers the opportunity to save for retirement. He’s proposed allowing working Americans to use a portion of their Social Security taxes to fund a personal retirement account, like a 401(k), that would contain real assets like bonds and stocks. This account would give everyone the opportunity to accrue a significant nest egg during their working lives.
Just as importantly, this reform would pre-fund future benefits, making Social Security sustainable over the long-run. Instead of relying solely on taxes from future workers to pay benefits, retirees would draw upon assets built up over decades. Such a plan would require an initial infusion of resources to cover current retirees, but this investment would allow a more financially secure system to emerge — an outcome well worth the initial sacrifice.
A system of personal retirement accounts would have many additional benefits. People would own the assets in their accounts, so those who die before reaching age 65 would be able to pass their wealth on to loved ones. (Under Social Security, surviving family members often get just $255 in exchange for decades of taxes).
Women who take time out of the workforce to care for children would continue to accrue retirement wealth by earning interest on previous contributions. Currently, a woman married less than 10 years who divorces has no right to the future Social Security benefits her husband accumulated during their marriage; under a system of personal accounts, those assets could be divided equally.
Social Security reform should be a no-brainer bipartisan issue, but it faces well-organized opposition — from labor unions, the National Organization for Women, the AARP, and others. These groups typically fail to offer solutions for Social Security’s problems while loudly criticizing proposals that would give people a small measure of control over their retirements. Women should resolve to get all of the facts. They will need to evaluate the impact of moving Social Security to a system based on savings and investment — and also consider the consequences of doing nothing.
Resolutions to start dieting and exercising are great, but resolving to be active participants in the coming Social Security debate could improve our finances for years to come. If we keep this resolution, we could be toasting a more secure retirement when we ring in 2006.