Concord Coalition: Question to Ask About Social Security

September 27, 2002

The Concord Coalition issued its Key Questions Voters Should Ask Candidates About the Budget, Social Security and Medicare, with the following question and information regarding Social Security reform:

"Social Security will begin spending more than it collects in taxes by 2017. After that, Social Security will run growing annual cash deficits in the trillions of dollars. How do you propose to reduce the growing financial burden on future taxpayers, while at the same time protecting the retirement security of future beneficiaries, or do you support the 'Do Nothing Plan?'"

Background:

Social Security is America's largest and most popular government program. But changing demographics make the current system unsustainable over the long term. Americans are living longer and having fewer children than in previous generations. Since Social Security relies on current workers to fund current beneficiaries, the decline in the number of new workers and increase in the number of beneficiaries will cause a massive future funding problem. While, an aging population is not a bad thing, steps need to be taken now to prepare for the coming retirement of the Baby Boom generation.

In 1960, there were five workers paying into the system for every beneficiary. The combined employer/employee payroll tax rate was 4.5 percent. Today, there are three workers for every beneficiary and the tax rate has climbed to 12.4 percent. By 2030, the trustees say that there will be two workers per beneficiary, and the cost of the program will rise to 18 percent of workers' pay. Assuming no changes in current law, the trustees say that benefit payments will exceed dedicated tax revenues by 2017. Although the Social Security trust fund shows a positive balance through 2041, the Social Security trust fund is primarily an accounting device. Social Security's "assets" consist of Treasury IOU's. The cash needed to make good on these obligations will have to come from tax increases, spending cuts, or borrowing from the public, all of which would constrain the budgetary options of future policy makers. The key is not trust fund solvency, but annual cash balance. The "assets" in the trust fund represent future general fund liabilities —not a cash reserve.

In fact, the cumulative cash deficits between 2017 and 2041 are projected to total over $5.7 trillion in today's dollars. Closing the cash shortfall in 2041, when the trust fund is depleted of authority to pay full benefits, will require a payroll tax hike of roughly 40 percent, or a nearly 30 percent cut in benefits. Wall Street's slump has taken two cherished free lunch Social Security reform options off the table. Politicians can no longer claim that investment returns from a never-ending bull market or general revenue transfers from perpetual budget surpluses will save them from making hard choices. There is a clear danger that without a free lunch to promise, politicians will fall back on an equally bad option — the Do Nothing Plan.

Imagine that a candidate promised to introduce legislation called "The Social Security Do Nothing Plan." Under this bill, promised retirement benefits would be cut by 16 percent for today's 30-year olds, by 29 percent for today's 20-year olds and by 35 percent for today's newborns. Alternatively, payroll taxes would suddenly go up by roughly 40 percent in 2041. How many candidates would campaign for office with such a plan? Probably none, and yet, these are the consequences of doing nothing.

Further, the Do Nothing Plan assumes that the multi-trillion dollar cost of redeeming the IOUs in the Social Security trust fund from 2017 through 2041 will be covered by the same group of workers who can look forward to the benefit cuts when it is their turn to retire.

Action must be taken soon to put Social Security on a fiscally sustainable and generationally equitable path. This will require tough choices. Candidates of both parties should get behind specific reform plans or be held accountable for supporting the consequences of the Do Nothing Plan.

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