NEW YORK (CNN/Money) -
In Bush's first press conference following his re-election, he again brought up the idea of an "ownership society" which I take to mean as privatizing Social Security. I can see the appeal of trying to get a higher return for the nation's nest egg, but wouldn't putting funds in the stock market be too risky?
The fact that the president brought up Social Security in his first post-election news conference certainly makes it appear that he's eager to tackle this issue. (For more on that news conference, click here.
Then again, it's been more than three years since the president appointed the 16-member Commission to Strengthen Social Security, and almost three years since that commission issued its report. Yet nothing has been done.
Making the hard choices
I don't think there's any doubt that the current system is unsustainable, largely due to demographic forces. As the boomers leave the labor force, we'll have fewer workers supporting each retiree. As a result, in about 14 years the money flowing into Social Security's coffers from payroll taxes won't cover payments to retirees.
At that point, we'll have to tap the famed Social Security trust fund (which really means the government will have to come up with the cash from taxpayers one way or another), and the trust fund is projected to run out in 2042.
The system wouldn't go "bankrupt;" money would still flow in from payroll taxes. But there would only be enough to fund about 73 percent of projected benefits, and that percentage would continue to dwindle over the years to about 68 percent.
How to fix it?
The big question, though, is how do you remedy this situation? Basically there are two camps. One wants to preserve the current system of having current workers pay for future retirees' benefits through payroll taxes but change the system in some way to make the numbers work.
Changes might include hiking payroll taxes or raising the amount of income subject to Social Security payroll taxes or cutting benefits for some Social Security recipients, or some combination of those things.
A detailed plan for this approach can be found in "Saving Social Security", a book written by economists Peter Orszag and Peter Diamond and published by the Brookings Institution earlier this year.
The second camp, of which Bush is a member, wants to preserve the current system for people already retired and those who will retire within the next decade or so, but change the underlying focus for younger workers and future retirees.
Specifically, the president has advocated allowing workers to put a portion of their Social Security taxes into privately owned accounts that would offer mutual fund-like investments and would be owned by the workers themselves.
How much of your payroll taxes you would be allowed to sock away into a private account is uncertain at this point. But my guess is that it would be somewhere around 4 percent, which is the figure the Commission to Strengthen Social Security used in "Model 2," which is the one of its three private-account models that got the most attention. (You can find the details of this model by going to the commission's report.)
There are risks either way
As I pointed out in a story I did a couple of years ago for MONEY, neither approach is risk free. Investing in stocks would expose one's retirement nest egg to the fluctuations of the stock market. I should point out, though, that to this point at least the president has not proposed allowing workers to put all their Social Security investments in private accounts.
What's more, one should be able to mitigate the investment risk associated with private accounts by tilting one's mix from stocks to less volatile investments like bonds and money market funds as one approached retirement.
Fixing the current system while maintaining its basic character may seem a lot less risky. After all, your retirement security will be assured by payments from the government as opposed to being dependent on the performance of the financial markets.
But in reality, what you're really counting on is that future generations of workers will be willing to pay your retirement benefits in the future with their tax dollars. If that burden becomes too onerous, who's to say future Congresses won't scale back benefits.
This possibility, if not likelihood, of future benefits cuts makes it all the more important that we buckle down and do some serious retirement planning along the lines I outline in my book, "We're Not In Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World". After all, you don't want to be totally dependent on Social Security come retirement time.
There are plenty of other issues to consider. If we decide to maintain the current system, we'll have to match revenues with the cost one way or another. Will we get the extra revenue by raising everyone's payroll taxes or only the taxes of the "rich"?
Would higher taxes reduce the incentive to work and produce more -- as many, if not most economists believe -- and, if so, might that not lead to a less vibrant economy that will have a harder time supporting retirees in the future?
If we go to private accounts, how will we continue to pay benefits to current retirees when the money that would have gone to them is now going into the private accounts?
I should also note that going to private accounts isn't a sure thing that would solve all of Social Security's problems. We might still have to cut benefits from their projected levels or raise payroll taxes. You can get a headache just thinking about all the factors that will have to be considered.
But consider them we must. Because the longer we delay taking this issue on, the bigger the adjustment we'll have to make, regardless of what reform route we decide to take. So I hope that president Bush will follow through on his plan to address Social Security.
I hope we have a nice big national debate that seriously considers the pros and cons of various alternatives. And rather than putting this tough issue off for future generations to grapple with, I hope we actually enact some type of reform.
Maybe then we can move onto the related problem of Medicare which, unfortunately, is even worse shape than Social Security and must also be addressed sooner rather than later.
Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."