Joseph Finnerty has been teaching at the College of Business since 1984. His research focuses on the management of stock markets and other financial institutions, and he recently wrote about the future of Social Security. He was interviewed by business and law editor Mark Reutter.
Some experts argue that Social Security is at a crossroads and, without major changes, may go broke sometime after 2052. Are these concerns credible?
Yes. Social Security will cease to exist, at least in the form it is in today, without radical changes. And politics will not be its undoing. Demography is far more important in understanding why Social Security cannot survive in the long run.
Social Security works as long as there are enough working people paying into the program to support payments going out to those who are retired. While a reserve of funds has been built up to support shortfalls of incoming payments, this can't last indefinitely. For Social Security to remain viable, there has to be a fairly large number of younger people relative to older people in the population structure. Seen as a graph, the structure needs to have a pyramid shape. But by 2030, the structure will look more like a rectangle. The system will fail financially when the ratio of young-to-old becomes more even.
Can this situation be changed?
You could raise the retirement age, perhaps to 75, and reduce the payments to those already in the program. But this would be a breach of contract for those already in the program. It would also be a huge disincentive for those being asked to join the system. What we need to be thinking about is how to devise retirement scenarios in a world without Social Security.
How can young people in the workforce best adjust to retirement without Social Security?
The federal government needs to create incentives for younger people to save for their own retirement. This might be achieved with tax-based incentives and possibly some direct subsidies. We have something like that now, with 401(k) and IRA programs. These need to be expanded to allow for more savings flow, and perhaps better incentives. These incentives might include higher tax rates on income or a consumption-based tax.
You mentioned demographics as all-important. Any possibility that U.S. population trends may change?
Actually, more immigrants entering the U.S. would help Social Security. Immigrants tend to be younger, have large families and add dynamics to our economy. Immigration may extend the pyramid structure and allow for some additional time, so that fundamental fixes to our retirement system can go more smoothly.
