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Tuesday, October 31, 2006

Social Security

For the recent retirees, the worry there won’t be a social security check next month hasn’t crossed their mind. But in the near future if social security is not reformed today, millions of retirees will have that ugly thought come true.

The reason for the scary thought is the fact that millions of baby boomer will start to retire starting as soon as 2008. As the result, the funds will shrink and eventually become empty. The children of the baby boomers will then have to chip in. It has been predicted by many that starting 2017 Social Security will begin to pay more out than it takes in. In year 1950 there are approximately 16 workers contributing to 1 person’s retirement. But in just 50 years, that number has declined to 3.3. While it takes average of 25 years to produce a new tax payer, the number of retirees consistently increases. As a result, there will be a major gap in contribution to Social Security. While payments must still be made out while funding is low or nonexistent, other programs funds will be reduced like environmental protection, highway construction, or worse national defense. Otherwise, income, sales, or property tax will have to be increased.

All of these sounds scary as it should, but there are solutions that can and will help Social Security stay afloat. Perhaps monthly checks should only be given to individuals when their saving ran out. An age cut off has also been talked about. However the most effective is the program called 401K. Most people only think about the short term, so their decision not contributing to a 401K can haunt them dearly when they retire. Since average saving dropped from 7.1% in 1992 to barely 1% today for the average worker, some have talked about automatically enrollment to a 401K account.

An article written by Jonathan Weisman in the May 22, 2005, page A05 edition of Washington Post did just that. House Ways and Means Chairman Bill Thomas (R-Calif.) said he would give incentives to companies who convert 401(k) balances to annuities accounts that would pay out slowly over a worker's retirement. Many employers have already liked this idea because increasing enrollment in 401(k) plans will help reduce the cost of administering them. Some economists also are embracing the idea.

Today, around 10 percent of the companies that offer 401k has already enrolled its new workers automatically giving them the choice of opt out. As the result, participation has jumped from average to 37.4% to about 85.9%.

The only problem some worry is people will sue if there are investment losses. In my opinion, 401k accounts are much less risky than depending on Social Security when people retire. Social Security is full of lies and having kids pay for their parent’s retirement is plain intergenerationally unjust. This automatically enrollment to 401k definitely gets my vote. After all, more savings mean more growth and prosperity. The economy will also be more efficient.

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