Social Security Advisory Board: "Act Now!"

July 24, 2001

The President's Commission to Strengthen Social Security was not the only group this month to warn of a Social Security crisis. The Social Security Advisory Board, a bipartisan group established by statute to advise the Social Security Administration, has issued a new report calling for reform "sooner rather than later." The 7-member advisory group took no position on the various options for reform, listing several possibilities including: individual accounts, benefit reductions, tax increases, general revenue transfers, and government investment.

However, the Board warns that Social Security is facing financial and demographic pressures that cannot be ignored. For example, according to the report, the number of workers supporting each Social Security beneficiary will decline from 3.1 today to 1.9 by 2070. As a result of these economic and demographic trends, Social Security will begin running a cash deficit by 2016. By 2038 the Social Security Trust Fund will be exhausted (the Board accepts the Trust Fund as an asset to the Social Security System, though it is a liability to the government as a whole), and social Security will be able to pay only 73 percent of promised benefits. By 2075, Social Security will be able to pay only 67 percent of promised benefits and the decline is expected to continue beyond that date.

If Congress fails to reform Social Security, the report warns that the only alternatives will be massive benefit cuts or tax increases. That would mean a reduction in the average Social Security benefit from $1,426 (in 2001 dollars) to $1,041 by 2038, with greater cuts in later years. Low-wage workers would see their average benefit fall from $864 to $631. Looking at this in terms of replacement rates (the percentage of pre-retirement income replaced by Social Security): low-wage workers would see their replacement rates fall from 49 percent to 36 percent. Average-wage earners would see a decline from 37 percent to just 27 percent. The result would be to throw millions more seniors into poverty.

As an alternative to benefit cuts, the Social Security payroll tax would have to be increased from 12.4 percent to 17.8 percent of wages. This would result in a $1,317 (in 2001 dollars) per year tax increase on average-wage workers, and a $3,199 per year tax hike for workers earning the maximum taxable income (expected to be $118,479 in 2038).

The report concludes that whatever Congress decides to do, it will be much more difficult to do it in the future.

"It's your money, your choice, your future."

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