Many people don't understand how the Social Security system really works. There are no separate Social Security "accounts" set up for each taxpayer to which he contributes his Social Security "tax" each year. Many people believe these accounts exist, that the money they pay into their accounts grows each year until retirement, and when they retire they get back what they paid in with interest. This is not true. Most people are unaware of the fact that our current Social Security system is a "pay-as-you-go" program, which means that the revenue the federal government raises each tax year for Social Security benefits is paid out that same year to beneficiaries. Many economists believe that our Social Security system is in need of a major overhaul if today's workers are to receive future benefits. Thomas R. Saving, Director of the Private Enterprise Research Center at Texas A&M University says, "What is wrong is that the Social Security system was never set up to be a sound investment-based retirement system."

Karl Borden, professor of financial economics at the University of Nebraska recently wrote, "Social Security is an unfunded pay-as-you-go system, fundamentally flawed and analogous in

In 1994, a poll was published indicating that more people in their twenties believed in UFOs than in Social Security. Many simply do not believe there will be anything in Social Security when they retire. A Wall Street Journal/NBC News poll showed that 29 percent of all Americans now expect to receive nothing from Social Security when they retire. Another 37 percent expect to get sharply reduced benefits. Among those under age 35, nearly half expect nothing whatsoever from Social Security. Unfortunately, there is good reason for skepticism. According to the latest report from the Board of Trustees of the Social Security Trust Funds (OASDI), Social Security tax revenues will be insufficient to pay current benefits as early as the year 2013. By 2020 tax revenues plus interest on the Trust Funds will no longer be adequate to pay for promised benefits. As more and more of this generation reaches retirement age, Social Security expenditures rise sharply. By the year 2030, Social Security outlays will have completely exhausted the Trust Funds and current revenues will be short of expenditures by about 2 percent of the annual gross domestic product. In order to meet such expenditures without cutting benefits, the Trustees estimate that the payroll tax would have to rise from the present 12.4 percent (half on employer and employee) to 19 percent. In a recent Cato Institute paper, William Shipman of State Street Global Advisors estimates that a worker born in 1970, investing all of his or her payroll taxes in stocks, would be able to retire in 2035 on $11,729 per month (in 1995 dollars), compared to an estimated Social Security benefit of $1,908. For this reason, there is a growing consensus that at least for younger workers there needs to be an alternative to Social Security. This would necessarily require some movement in the direction of privatization. Rep. John Porter, R-Ill., and Sen. Bob Kerrey, D-Neb., have suggested partially privatizing Social Security by cutting the payroll tax rate by 1.5 to 2 percentage points and requiring that the tax savings be invested in a form of individual retirement account.

The heart of the Chilean system is a mandatory savings plan. All workers under age 45 contribute 10 percent of their monthly earnings in special accounts, known as AFPs (Administradoras de Fondos de Pensiones). Workers between ages 45 and 65 could shift to the new system at their option. The funds in AFPs are professionally managed and invested in stocks and bonds. The money may not be touched until retirement, at which time the worker may begin phased withdrawals or purchase an annuity. At the end of 1995 more than $25 billion was invested in AFP accounts. The old Social Security system is being phased out. By 2030 Chile's Social security will entirely be privatized.

Politicians have been extremely reluctant to change Social Security because any misstep could provoke explosive reactions from the program's 43 million beneficia

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Approximate Word count = 1988
Approximate Pages = 8 (250 words per page double spaced)