Finding a solution to the problems facing the Social Security system will be one of the more formidable tasks Congress is faced with in upcoming years. The nation's public retirement system is the primary provider of funds for the majority of retirees and the largest direct tax on most workers. Implementing changes will therefore be a tricky balancing act between ensuring adequate benefit levels and managing costs. Reforms are further complicated by the intergenerational nature of the program: Decisions have to be made evaluating not just how they affect today's participants, but also their impact on future generations.

Daunting as the task may be, every year of delay costs the country not billions, but hundreds of billions of dollars. Clearly, time is of the essence. So, are our representatives rolling up their sleeves and hammering out a balanced solution? Sadly, no. Most politicians have either ducked the issue entirely or focused on the hot-button issue of "privatizing" Social Security. While some pretend the system will need only a "few nips and tucks" to remain solvent, others argue over whether creating individual investment accounts would lead to million dollar nest eggs or the "Enronizing" of Social Security. Meanwhile, the tough, but inevitable choices of how to actually rebalance the system continue to be largely ignored.

The problems facing Social Security are not going away on their own. At $450 billion, Social Security is the government's largest program. It is run primarily on a pay-as-you-go basis, meaning each generation pays for the previous one's retirement and the next generation pays for theirs. While the program is projected to run surpluses for the next fifteen years, demographics have now conspired with basic economics to throw a wrench into the system. As the unusually large baby boom generation retires, life expectancies increase, and labor market growth slows, Social Security revenues will no longer be able to cover benefits. The overseers of the system estimate it would take $10.5 trillion put aside today to create the reserve necessary to cover all the promises the system will make but not be able to pay for.

Thus, the central question of reform is this: Whose taxes should be increased and whose benefits should be reduced? One can attempt to dress up these unpalatable choices in all sorts of more pleasing packages, but in the end, that's what it boils down to.

Though ideologues on either side will push for one option or the other, any balanced solution will have to involve both tax increases and benefit reductions. Given that the retired population is expected to increase by 75 percent over the next 25 years, certainly new funds will have to flow to the system. At the same time, Social Security and other entitlements programs are already squeezing other important areas of the budget. The federal government currently spends eight dollars per senior for every one it spends on children, little of which is actually based on need. Without changes, spending on Social Security, as well as Medicare, will continue to push this ratio higher. Rather than transforming the federal government into a virtual ATM for retirees, containing soaring costs of entitlements programs must be part of the solution.

The second key question is how soon to make changes. They can be phased in before they are needed, or they can be postponed until they are forced upon us because the program can no longer cover benefits each year. Not only would making changes right away spread the costs more fairly, it would strengthen the economy, (assuming, that is, the money is actually saved).

Still, many politicians have latched onto the notion that current and even near-retirees should be spared from any reforms. While politically this makes sense, exempting tens of millions of citizens -- regardless of economic well-being -- greatly increases the costs that will fall on younger participants. Furthermore, while current retirees are on net receiving generous windfalls from the program, tax rates are higher and relative payouts much lower for younger generations. Lumping the full costs of reforms on them only exacerbates that inequity.

The other important reason to start making programmatic changes immediately is as a way to strengthen the economy. Both the government and individuals continue to spend too much and save too little, which leaves both overly indebted while draining capital away from productive investments. While the country has been able to maintain sufficient levels of investment through borrowing from abroad, the arrangement cannot be sustained indefinitely. Thus, making changes to Social Security immediately and ensuring that the additional money is truly saved could do wonders for long-term economic growth.

Finally, there is the question of where to save the money. One option is to continue depositing Social Security's savings in the program's dedicated trust funds as we have for the past two decades. Under this approach, however, the money rarely gets saved. Because of how government trust funds work, the money is automatically commingled with other tax dollars and spent on other programs. It's not worth playing the finger-pointing game over who has repeatedly raided the trust funds. Instead, it is better to simply recognize that Social Security's money needs to be saved and the government is not the best place to save it.

This is where individual accounts come in. Though many justifications for creating accounts have been put forth, including increasing returns and giving workers ownership rights to their contributions (which they currently do not have), from an economic perspective, the most compelling justification is to increase national saving. Workers would save the portion of their Social Security tax not needed to pay retirees' benefits in individual accounts, building up personal savings for their own retirement. The account contributions would be paired with reductions in government financed benefits, helping to balance the program over time. (A main argument against accounts -- that they would be too risky as inexperienced investors gambled their retirement savings on high-flying stocks in a bubble economy -- can be easily addressed. Investment regulations could be modeled on the government employee pension plan and limited to a handful of well-diversified low-cost options to protect against excessive risk and mismanagement.) In retirement, participants would then have two Social Security-based sources of income.

Concurrently, structural changes would be phased in. A promising and balanced approach would be to combine increasing the cap on taxable wages (right now, participants only pay Social Security taxes on the first $87,000 of income) with a flexible retirement age and longevity indexing of benefits -- or adjusting the annual benefits each group of retirees would receive to reflect growing life expectancies. (No group of retirees would receive less than those that came before them, as the changes would merely reflect that their benefits would be spread over a longer period of time.) A larger share of benefits for well-off retirees would be included in taxable income, and outdated spousal benefits, which reward married people who do not work at the expense of singles and dual-working couples, would be gradually phased out.

There is, however, one potential problem with accounts that needs to be addressed. The current Social Security system is designed to be progressive. Low-income retirees receive larger benefits relative to their earnings than do wealthier participants. Accounts in their simplest form would undermine this progressivity since account earnings would be solely contribution-based with no progressive payout design.

Instead, sliding-scale government matches should be included for the savings of lower-earners, to create a system of "Progressive Private Accounts" which would empower low-earners by bringing them into the asset-owning class, helping to build up their accounts more quickly, and maintaining the basic commitment to a progressive Social Security design.

Recently, the general popularity of individual accounts, combined with political timidity, has led to a spate of account-based plans that would do more harm than good. First, there are "debt-financed" accounts where participants would be guaranteed all of their promised benefits with no increases in their Social Security taxes. Such plans would be financed through massive government borrowing. Participants would build new assets in their accounts, but the corresponding government debt that either they or their children would have to repay would be less transparent, not to mention the damage to the economy through higher interest rates from such high levels of debt. Another undesirable option is "supplemental accounts," which would be layered on top of the existing Social Security system. While proponents of these plans are willing to specify what new taxes would be used to fund them, they fail to specify how they would balance Social Security. Ironically, this approach would create a new government retirement program while ignoring how to pay for the one we already have.

The public needs to know there is no silver bullet when it comes to Social Security reform. While investment accounts can help ensure that money is saved and Progressive Private Accounts can do so in a way that is true to the fundamental principles of the program, all plans will involve making tough choices. In order to devise a plan that is fair to younger participants and future generations, we need to start making these choices immediately.