Generation Xers and Gen-Yers like me have a hard time showing interest in what goes on in Washington. But we had better end our apathy -- and soon -- or we'll spend the rest of our lives paying for it. Members of the generation that came before us -- the Baby Boomers -- are trying to pull a scam under the guise of "protecting" Social Security. If they succeed, we -- and our children -- will be the poorer for it.
Everyone knows Social Security is in trouble (and President Bush's Commission to Strengthen Social Security released its report on reform yesterday). But few people understand what that trouble is and whom it will affect. Understanding that is the key to understanding the scam.
Right now, Social Security is in great health. This year, like so many before, hundreds of billions of dollars will pour into it from FICA and payroll taxes, and only some will go back out as benefits to retirees. The rest will be exchanged for government bonds, which the federal government will pay back -- with interest -- to Social Security in the coming years.
But things will change in the next decade, when the Boomers will retire and start collecting benefits. By 2016, so many people will be drawing Social Security that the money needed to cover benefits will be more than what we Gen-X/Y workers will be paying in taxes. Fortunately, the program will be able to cash in the bonds that it's now buying, and will use the repaid principle and interest to keep up the benefits.
However, that can only support Social Security for a few more decades. The bonds will all be cashed in by 2038, just as we Gen-Xers (whose Social Security tax money will purchase many of those bonds and whose federal tax money will pay them off) approach retirement age. So, just as we're about to collect Social Security, there will be nothing left in the Social Security storehouse for us to collect.
Hence, the Social Security crisis does not involve today's seniors -- Social Security will have plenty of money for the next 35 years. Instead, the crisis concerns us Gen-X/Yers, who will pay in a lot and receive just a little.
Ever since we Gen-X/Yers began working, we've paid 12.4 percent of our earnings to Social Security -- half taken through the "FICA" tax on our paycheck and half through the payroll tax. In the coming years, Congress likely will increase that rate to more than 17 percent to delay the 2038 catastrophe. What is more, the Medicare tax (which is now a mere 2.9 percent) will increase because that program faces an even worse crisis than Social Security.
In contrast, the Boomers will get a bargain. When they entered the workforce in the late 1960s, they paid only 6.5 percent of their earnings to Social Security and nothing to Medicare. For about half of their working years, the Boomers paid 10 percent or less to Social Security and less than 1.25 percent to Medicare. Only from 1990 on, when the Boomers had earned paychecks for a quarter-century, did they start paying 12.4 percent to Social Security and 2.9 percent to Medicare -- the same percentage we Gen-X/Yers have paid our whole lives.
That's the Boomers' bargain: They've paid less of their earnings into Social Security than we Gen-X/Yers, yet they'll receive more in benefits than we will and we'll pick up the tab. And when we retire, there will be no money saved in Social Security to pay for our retirement, unless we pull the same scam on our children that the Boomers are pulling on us.
The Boomers are working hard to protect their sweet deal. Many Boomer-elected politicians claim it's "too risky" to change Social Security and do away with the scam. One, Rep. Jerrold Nadler (D-NY), even asserts that the program is in no trouble at all and should be left alone.
But we Gen-X/Yers are catching on; we're seeing through the phony claims and recognizing the generational cash-grab scam for what it is. And we are beginning to realize that we need to offer this warning: If the Boomers don't reform Social Security now, they'll have no right to complain when we do so in the future.