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Generation X May Make Social Security Privatization a Winner

by Carrie Lips

This article appeared on cato.org on November 13, 1998.

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Jesse "the Body" Ventura's victory provides interesting tea leaves for pundits trying to make sense of the electorate. But just as important as the success of a maverick third-party candidate is the emergence of the voting bloc that helped to elect him: Generation X.

Not only did almost half of voting Gen Xers support Ventura, 26 percent of the 18- to 24-year-olds surveyed by the Minneapolis Star-Tribune said that if it hadn't been for Jesse, they would have stayed home. Is the lesson here that Generation X backs only pro wrestlers and other candidates who break the political mold? Maybe. But the more important lesson is simply that Generation X will turn out if motivated. And as Gen Xers learn that their collective voice can make a difference, they may start using it more often.

The potential for a politically active Generation X is particularly important as national attention shifts to Social Security reform. Typically, any whispers from the 20-somethings on this subject are drowned out by a deafening roar from senior citizens. Certainly Social Security reform does not seem like an issue with appeal for Generation X. After all, this generation has largely written off Social Security--polls show that most Gen Xers expect the system to go bankrupt before they see a dime in benefits.

During the next year Generation X will learn that the debate is about more than just far-off monthly retirement checks. It's also about a tumorous tax burden that will eat away larger and larger portions of their incomes throughout their working lives, unless Social Security undergoes fundamental reform. Although defenders of the status quo say that the system can be fixed with "small adjustments," Generation X would be wise to apply its legendary skepticism to such claims.

If Social Security were reformed to allow all workers to put their payroll taxes in individually owned, privately invested accounts, today's Gen Xers could amass substantial assets by the time they reach retirement.

According to the Social Security Administration, taxes will have to be raised 50 percent or benefits will have to be reduced 25 percent over the next 35 years. But the same changes in demographics that make Social Security fiscally insolvent will make benefit cuts equally untenable. Soon baby boomers will begin to swell the ranks of the retired. If politicians think it's difficult to reduce benefits now, imagine the world in 2030 when 22 percent of the population will be over age 65. Voting to cut benefits for a group that large would be suicidal.

That leaves the other "small adjustment," higher taxes. Generation X will soon find that the tax increases required to make Social Security solvent will be anything but small. In 2013 the government will have to begin redeeming the bonds in the "trust fund" to meet benefit obligations. To do that, politicians will have to raise taxes, increase debt or cut other spending to pay back the trust fund. Each year thereafter, politicians will face the same dilemma of having to squeeze spending from other programs or increase taxes. Without benefit cuts, FICA taxes in 2032 will have climbed to 18 percent.

This isn't some end-of-the-millennium doomsday scenario; this is the situation described by the Social Security Board of Trustees. And if the thought of paying almost one-fifth of one's income to support just one federal program is not incentive enough for Gen Xers, there is an even more compelling reason to champion Social Security reform: the overwhelming benefits of moving to a system of personal retirement accounts.

If Social Security were reformed to allow all workers to put their payroll taxes in individually owned, privately invested accounts, today's Gen Xers could amass substantial assets by the time they reach retirement. A 25-year-old who makes $26,000 would have $438,640 by age 67, assuming a rate of return of just 5 percent. That would provide a monthly benefit of $3,292--almost triple the benefits promised by Social Security.

Such reform would also free this and future generations from dependence on politicians for retirement security. Currently, seniors have no right to their benefits. They are at the mercy of politicians who can at any time reduce, or even eliminate, their future benefits. This makes seniors easy prey for politicians who promise to reward votes with increased benefits or, as seen in this election, warn that the opposition will take away retirement security.

The idea of getting the politics out of retirement security should appeal to a generation known for its independence and distrust of government. Already, Generation X overwhelmingly favors personal retirement accounts. Gen Xers' passive support may become very active support, as they begin to realize how much they have at stake in this debate.