Social Security Benefits about to Go "Over the Cliff"

August 26, 2003

In his editorial for the Wall Street Journal, Pete du Pont, a former governor of Delaware and policy chairman of the National Center for Policy Analysis, promotes one proposal for personal accounts. This proposal gives a government-guaranteed Social Security complement to a personal account benefit so that, when combined, the net benefit will at least match scheduled benefits. Highlights of his editorial, "Social Security Is about to Plunge, But Retirement Benefits Don't Have To," follows:

"Have you ever fallen off a cliff? If you are younger than 40, you are about to. Social Security is fast approaching a financial precipice that will plunge benefits and smash retirement plans for millions of Americans.

"According to the General Accounting Office's July 'Social Security Reform' study, beginning in 2038 Social Security won't be able to pay the benefits promised to retirees without dipping into general federal revenue or borrowing an inordinate sum. Unless more money is found, Social Security checks will drop by 27 percent.

"Actually it's worse: The GAO concludes that in 2018—just 15 years from now— 'Social Security's tax income is projected to be insufficient to pay currently scheduled benefits.'

"Right now FICA taxes take in more than Social Security pays out, so Congress happily spends the 'extra money' on a variety of other programs. This revenue stream amounts to about 6.5 percent of all the money the federal government collects in taxes on income.

"But when that reverses in 2018, the Social Security Administration will need all of its FICA taxes plus about 1.5 percent of income tax revenue, if it is to keep paying benefits. By 2020, paying benefits to the growing army of retiring baby-boomers will eat up 3.4 percent of income tax revenues. Five years later, 9 percent and the amounts rapidly rise after that.

"Unless something is done, the Social Security Administration will have no choice but to cut benefits. … People born in 1955 won't see any benefit reductions until they are 83; then they will fall off the cliff. But if you were born in 1970, you fall off the retirement income cliff when you are 68, shortly after retirement.

"'Absent reform,' the GAO concludes, 'the nation will ultimately have to choose between persistent, escalating deficits, significant tax increases, and/or dramatic budget cuts of unprecedented magnitude.'

"So, what to do? Well, we could just let the benefits drop. … Or we could commit to pay full benefits whatever the cost. The GAO concludes we could raise FICA taxes this year to 14.3 percent from the current 12.4 percent, but as more and more baby boomers retire the tax rate would have to continue to rise, reaching close to 20 percent the National Center for Policy Analysis estimates.

"Or we could keep Social Security benefits the same, FICA taxes the same and just borrow the amount we need each year. That would mean adding $27 trillion to the federal debt, an expensive and irresponsible thing for the government to do.

"There is a better way, one that guarantees current benefits to retirees, avoids raising taxes and doesn't burden the government with unsustainable debt. NCPA President John Goodman presented it to President Bush's Social Security Commission two years ago. It's called Personal Savings Accounts.

"First, the government would guarantee existing Social Security benefits to everyone who chose to participate in the new PSA system, with no increase in the retirement age.

"Second, two percentage points of every participating worker's current payroll tax would be used to fund an individually owned market account. The funds in these PSAs would be invested every year in a balanced portfolio, approximately 70 percent stocks and 30 percent bonds. Workers would choose among a variety of investment funds, which would be government certified and required to maintain balanced portfolios.

"When they retire, those who paid into PSAs would start receiving two checks. One would come from their PSA and the second from the government. The second check would be calibrated to ensure everyone received the total benefit amount they would've gotten under the old Social Security system.

"Finally—and possibly the most important for lifting new generations out of poverty—spouses, children or other dependants would inherit a family member's PSA assets whenever he dies (be it before or after retirement). Under our current Social Security system, workers paying FICA taxes own no assets and their survivors will inherit nothing from the system.

"This solution would guarantee retirement benefits, which Social Security does not. Accumulated retirement savings in PSA—hundreds of thousands of dollars over a lifetime—would become part of each person's estate (enabling it to be passed to heirs), unlike current Social Security benefits. And the money borrowed to begin the new system would be repaid over 75 years. Most important, it would avoid pushing millions of younger people off the approaching financial cliff."

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