Gerald Swanson, Ph.D. Guest Columnist

Guest Commentary

Reforming Social Security is the hot topic of the day. Rightfully so! Seniors and baby boomers are very concerned about how proposed changes to the system will affect them and their ability to retire with some degree of financial security.

What about college students and other young people in our economy? Should they be concerned about the financial problems facing Social Security?

The answer is, without a doubt, a resounding yes! Left unfixed, the financial problems facing Social Security will fall squarely on their shoulders. Just think about it. If we cannot cut benefits to current retirees and those about to retire, what makes you think we will be able to cut benefits once the 78 million baby boomers start to retire? By the way, a baby boomer is someone born between 1946 and 1964. The boomers will begin to reach retirement age in just four years and then will proceed to cause the number of retirees to swell for the next 18 years. During that period, today's college students will be entering their prime earning years, and if the system is not fixed, they will be asked to come up with trillions of additional dollars to pay the boomers their promised Social Security and Medicare benefits.

In today's debate about the financial health of the system, some say that the system is in a crisis, some say the system is fine and has enough financial resources to pay benefits until 2044. As is the case in many emotionally charged debates, the facts put the real problem somewhere between these two extremes.

For openers, you all should know that Social Security is just a massive Ponzi scheme. It is a pay-as-you-go system. Its ability to pay out benefits is entirely dependent on the amount of revenue those currently working pay into the system. And just like a Ponzi scheme, the system fails when those paying in cannot support the promises made to those receiving the payments. The ratio of those paying into the system to those receiving benefits is going to shrink when the boomers retire. When the program started, the ratio was 45-to-1, and 40 percent of those paying into the system did not reach the 65 retirement age. Today the ratio is 3.3-to-1 and will continue to decline as the boomers retire. The problem will become more pressing not just because of the sheer size of the baby boomer generation, but also because the vast majority of baby boomers are expected to reach retirement age and live much longer than previous retirees. The fact is that the cost of Social Security benefits will start to eclipse revenues flowing into the system in 2018.

Another issue that makes the reform debate more confusing is that our government continues to mislead the public regarding the solvency of the Social Security program by saying that the Social Security Trust Fund actually has assets. In reality, the term "Social Security Trust Fund" is an oxymoron. There are no funds and the system can't be trusted. All the surplus payroll taxes that are supposed to be in the trust fund have been spent and replaced with non-marketable IOUs from the U.S. Treasury. The federal government owes the Social Security Trust Fund more than $1.6 trillion. President Clinton's fiscal 2000 budget explained the "trust funds" this way: "They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that when redeemed, will have to be financed by raising taxes, borrowing from the public or by reducing benefits or other budget expenditures."

The same demographics that drive the Social Security problem also drive the Medicare problem. As bad as the Social Security problem is, the Medicare problem is worse. There are several reasons why the Medicare problem will eventually dwarf the Social Security problem. One is that health care costs are rising twice as fast as other costs, and prescription drug costs are rising twice as fast as health care costs. The combination of a large aging baby boomer population, increasing life expectancy and rapidly rising health care costs puts Medicare and Medicaid expenditures on an unsustainable growth path. In 2004 it was announced that the funds going into the Medicare Trust Fund would be less than the amount being paid out. Think about it, our Medicare program is in the red before the 78 million baby boomers have started to claim their benefits.

The official projections of Social Security Trust fund now estimate that our future Social Security promises exceed projected revenues by $10.4 trillion. Our commitments for Medicare currently exceed projected revenues by $62 trillion. These are gigantic, unfunded liabilities that are increasing by $1.5 trillion each year our leaders in Washington fail to address these problems.

Now for the hard part, what should the government do? Better yet, what will voters allow our politicians to do? To start with, we must agree on the facts that define the problem. We must stop punishing the truth tellers. From my research on these issues I have found that most politicians understand the math associated with these problems, but they believe that if they address these issues they will not be re-elected. We must support our politicians when they have the courage to address these problems. Stop making any talk about changing Social Security and Medicare the third rail of politics, the third rail being the one that powers subways - if you touch it you die. We must face the fact that what must be done will cause some pain. We must understand that the longer we wait, the greater the pain will be.

The time to act is now.

We need to start telling the younger baby boomers that they are not going to get all the entitlements they have been promised. They already think this might be the case, now we have to confirm it. In reality, there are three basic choices regarding this fiscal problem: cut benefits, raise taxes, run massive budget deficits or some combination of the three. As the Concord Coalition so aptly put it: "Social Security reform is not ideological, it is simple math."

These are difficult choices that must be made. The sooner we start to make these choices, the brighter will be your economic future and the economic future of our country. As an economist, I want you to remember TANSTAAFL. There ain't no such thing as a free lunch.

Gerald J. Swanson, Ph.D., Professor of Economics, Thomas R. Brown, Chair in Economics Education, Eller College of Management. He can be reached at letters@wildcat.arizona.edu.