The good news: Social Security can be fixed. There is a crisis coming – and we have a few years to improve the program's viability. The tougher news: Any changes will be painful.

The American Academy of Actuaries, a group that reviews financial risk and policy issues, says the next president should consider raising the official retirement age, which now ranges from 65 to 67 years (depending on your age).

The recent financial crisis and ensuing stock market gyrations have drawn renewed attention to Social Security reform, in particular proposals to establish personal retirement accounts that invest in stocks and bonds. As Barack Obama asked a campaign audience, "Imagine if you had some of your Social Security money in the stock market right now. How would you be feeling about the prospects for your retirement?" But despite the recent market downturn, individuals investing four percentage points of the 12.4 percent payroll tax in a personal account holding a "life–cycle" portfolio and retiring today would have increased their total Social Security benefits by more than 15 percent. Moreover, a simulation of ninety–five cohorts of individuals retiring from 1915 through 2008 found that all of them would have increased their total Social Security benefits by holding personal accounts. These results are not intended to understate the risks of equity investment, but rather put them in perspective. Some analysis has overstated the importance of returns over a short period of time relative to those over the full course of a working lifetime by looking at declines in stock returns over only the last year. While individuals retiring today may have ended with a lower account balance than they expected, they would nevertheless have significantly increased their total retirement benefits by virtue of choosing to participate in a personal retirement account.

To: Voters Under 35

Subject: Your Future

Recommendation: Get Angry

You're being played for chumps. Barack Obama and John McCain want your votes, but they're ignoring your interests. You face a heavily mortgaged future. You'll pay Social Security and Medicare for aging baby boomers. The needed federal tax increase might total 50% over the next 25 years.

Plus there's the expense of decaying infrastructure — roads, bridges, water pipes. Pension and health costs for state and local workers have doubtlessly been underestimated. All this will squeeze crucial government services: education, defense, police.

It's almost a sick joke: Congress declared this "National Save for Retirement Week." The goal is clear enough because –– as the Senate resolution put it –– "whereas Social Security remains the bedrock ... but was never intended by Congress to be the sole source of retirement income for families" while "less than two–thirds of workers or their spouses are currently saving for retirement and that the actual amount of retirement savings of workers lags far behind the amount that is realistically needed to adequately fund retirement."

Work hard. Save more. Retire early. Ah, the American dream. Platitudes dissed by reality.

Can you imagine the government forcing you to take benefits you didn’t want? How about a situation where you’d have to sue the government to get out of taking those benefits?

Welcome to Washington –– and the upside–down logic behind federal entitlements.

Policymakers here are well aware that Medicare and Social Security are living on borrowed time. The Medicare Trustees reported earlier this year that the program’s Part A (the hospital insurance program) will start spending more than it takes in through taxes in 2011. The Part A trust fund will be totally exhausted eight years later. At that point the government will either have to slash benefits or jack up taxes, since it will run a deficit from that point on, forever.

Wall Street's wild ride over the last few weeks has many critics of President Bush's 2000 campaign promise to create personal Social Security accounts dredging up the issue to score points with justifiably frightened voters.

Barack Obama's campaign has used the issue as a cudgel to whack John McCain, who supported President Bush's plan. Embattled GOP senators such as New Hampshire's John Sununu are also finding themselves on the defensive as the issue of private accounts is resurfacing in campaign attack ads.

President Bush deserves criticism for the way he pushed private accounts, but not for the idea itself. He deserves scorn for the awful way his administration argued for the idea; for his refusal to expend any political capital to pass what would have been a historic, game–changing reform; and for the way he abandoned the issue at the first sign that it was hurting him politically. The same goes for Republicans who once supported the idea, but who today no longer have the courage to argue for it.

The United States Social Security system is fairly unique in that it explicitly allows for a progressive formulation of retirement benefits by assigning a larger replacement rate to workers with small pre–retirement wages. In contrast, the public pension systems in other countries often replace a constant fraction of pre–retirement wages, although the length of the "averaging period" is typically shorter relative to the U.S. This paper examines the ex–ante optimal U.S. Social Security benefit structure using the model developed in Nishiyama and Smetters (2007). On one hand, progressivity in the benefit structure provides risk sharing against shocks that are difficult to insure privately. On the other hand, progressivity introduces various marginal tax rates that distort labor supply. Rather surprisingly, we find that the ex–ante best U.S. Social Security replacement rate structure is fairly "flat." Intuitively, the relatively long averaging period used in the U.S. system formulation already provides some insurance against negative idiosyncratic shocks, but in a manner that is more efficient than explicit redistribution.

WASHINGTON –– Has anyone heard conservative critics complain about "socialism" as they watch Uncle Sam partially nationalize some of the nation's big banks with an injection of $250 billion? President Bush announced the desperate move –– which is completely alien to the free marketers of Republican Party –– and stressed that the government's role would be limited and temporary. The move still represents "corporate welfare," long resisted, but now welcome by Bush and his conservative colleagues. The goal is to restore public confidence in our financial system. The dramatic decision to have the public sector buy up part of the private sector ties in with the latest bank rescue plans adopted by European governments.

Black is black. I want my money back. — with deep apologies to Los Bravos.

You thought Monday was black. Imagine the darkness had the sum of the nation's Social Security nest egg taken a 7 percent dive in one trading day.

It would have done so if Congress had signed on to George W. Bush's plan to privatize the program three years ago.

Like that federal surplus said to stretch out as far as the eye could see as he took office, playing the market with Social Security was touted as a can't–miss proposition.

Entitlements: Barack Obama and a think–tank guru suggest that the financial crisis proves the folly of allowing private retirement accounts. To the contrary, having that money in real named accounts is still a good idea.

"If my opponent had his way, the millions of Floridians who rely on it would have had their Social Security tied up in the stock market this week," Obama claimed while campaigning recently in Florida. "Millions of families would've been scrambling to figure out how to give their mothers and fathers, their grandmothers and grandfathers, the secure retirement every American deserves."

Election '08: The country could use an honest debate on Social Security, particularly in an election year. From comments made over the weekend, though, it's clear that Barack Obama is not the man to provide it.

Speaking Saturday via satellite to an AARP group, Obama, who might not always know what city he's in or how many states make up the union, but knew well to whom he was talking, warned that his opponent John McCain would "gamble" their retirements by privatizing Social Security.

Today is the 73rd anniversary of the Social Security program, which provides retirement, survivors and disability benefits to over 50 million Americans. While there is reason to celebrate the past, we should also focus on the future. The retirement of the baby boomers and aging of the population will put pressure on Social Security's finances. Between today and 2040, the U.S. population will add three seniors over age 65 for each American under age 20. Social Security is already the largest program of the federal government, and over the next 30 years its costs will rise by 50 percent relative to its tax base.

The warnings have rumbled for decades: Just wait till the baby boomers retire. If you think there are strains on Social Security and Medicare now, brace yourselves for the implosion as the boomers start heading out to pasture. With the first of that generation now doing just that, we should be seeing the dust cloud soon, right?

While Social Security is projected to begin running deficits within the next decade and become insolvent during the early 2040s, a significant degree of uncertainty accompanies these projections. This uncertainty causes some to argue for delay in addressing projected deficits.

A torrent often begins with a trickle –– and so it is with entitlement spending. The flood of retirees that could overwhelm Social Security, Medicare and Medicaid has started slowly, but it’s underway.

Last October Kathleen Casey–Kirschling, a 61–year–old teacher born in 1946 (supposedly the first baby–boomer born), became the first baby–boomer to file for Social Security benefits.

Her filing generated media attention. She completed the process at the National Press Club, then told reporters she looked forward to her benefits. “I’m thrilled to think that after all these years that I’m getting paid back the money that I put in,” she said.

Sen. Barack Obama has a bad idea for "extending the life of Social Security." He has proposed applying the Social Security tax to incomes above $250,000, in addition to the current tax on incomes up to $102,000. It's unfair, he explained, for middle–class earners to pay Social Security tax on "every dime they make" while the very rich pay on "only a very small percentage of their income."

Reporters cited the Obama statement without asking for the logic behind having someone making $100,000 pay on every dime and someone making $250,000 pay on just 41% of income, while someone making $10,000,000 would pay on 98.5% of income. There is no economic principle or theory of tax law that would endorse such a result.

Here are two practical concepts for improving the welfare of all the citizens of a nation, especially the poor and the ill and the disabled. At least twenty nations have already adopted variations of these proposals, and they seem to be benefiting enormously thereby. They have not yet been adopted in the United States, except in small pockets, even though some of the key ideas were very well put forth by Steve Forbes in his campaigns for the presidency in 1996 and 2000. The Democrats in Congress blocked them when they were put forth by President Bush in 2005. These proposals are a threat to those with vested interests in government–run social democratic programs, because they tend to achieve many more goods, with greater efficiency, at less cost, and as a far greater impulse toward personal autonomy.

Congress is spending us into a hole. We hear about the cost of earmarks and the Iraq war. But what about "entitlements"?

That's the government's ironic term for programs that transfer money from people who earned it to people who didn't.

Entitlement? How can you be entitled to someone else's money?

To finance "entitlement" programs, the government threatens force against the taxpayers who provide the money. Why are people who favor compulsion called humanitarians, while those who favor freedom are stigmatized as greedy?

In 1984, Boston College quarterback Doug Flutie won a football game with a last–second desperation pass called a "Hail Mary." It was a miraculous event that sports fans will never forget. But the next day not one football coach in America changed his playbook. Why? Because a coach’s game plan is never about last–second gambles. It is about executing smart, achievable plays to advance the ball, make first downs and eventually score.

On January 1 of this year, the first Baby Boomers became eligible for early retirement Social Security benefits—the first drop in an inevitable demographic flood which, over the next 20 years, will bring 78 million Americans into benefit eligibility.

Just the thought of this keeps David Walker, our nation’s former Comptroller General awake at night.