While the American economy has been suffering, many of us don’t understand the severity of our debt. In a recent article by Luarence Kotlikoff, he reveals that the issue of Social Security cannot be avoided anymore because Social Security is bankrupt.
Social Security has a debt of $25.8 trillion, and is 32% underfunded. According to Kotlikoff, “if we don’t hike the system’s tax by one third starting today and keep it there forever, we’ll need to raise the tax by even more down the road.” This seems like a drastic statement, but what is more astounding is the fact that nothing has been done about this dilemma yet. Kotlikoff’s call for immediate action parallels the philosophy found in Machiavelli’s The Prince: the longer we wait to deal with a situation, the worse it will get, and the harder it will be to resolve down the road.
The problem with Social Security is that it is being funded by people that have not generated a need for it yet: younger generations. Kotlikoff refers to this as a classic Ponzi scheme, which he claims cannot end well. In order to put an end to this cycle, we must freeze our current system while we work to pay it off. This is known as the Purple Social Security Plan.
The Purple Social Security Plan is a plan that would either increase the rate of taxes by about 4%, or decrease the amount of benefits by about 22%. While neither of these options sound desirable, the longer we wait to take action, the greater the percentages will become. Further, the Purple Social Security Plan calls for a reform on the many confusing rules of Social Security. Social Security’s handbook contains 2728 complex rules, and the Program Operating Manual contains thousands of rules to help explain the rules in the handbook. Many people do not understand the infinite number of laws concerning Social Security and end up messing up their finances for retirement. The Purple Social Security plan states that we must come up with a system that is easier to comprehend and carry out.
The most important aspect of Social Security reform is not the how, but the when. We need to take immediate action to fix our flawed system in order to protect future generations from a crumbling system. It is crucial that we reform the system before it worsens and we are left without any form of Social Security.