News & Events In the Media 

Some Points to Keep in Mind When Social Security Reform Heats Up

Author: Miles Benson

Published: January 4, 2005

Sit back and get ready for a titanic political struggle over Social Security reform. But before the fog of battle obscures reality, here are a few things to remember:

-- In the long run, the popular retirement program, as now designed, is indeed financially unsustainable. Far in the future, if nothing is done, it will run short of money to pay all promised benefits in full.

-- It can, however, sustain itself for decades to come if the backing of the "full faith and credit of the United States" -- words printed on federal IOUs held in the Social Security Trust Fund -- means what it says: that payment is guaranteed.

The problem can be summarized more easily than it can be solved:

Right now, Social Security takes in more in taxes than it pays out in benefits. In fact, the government has been borrowing those surpluses to keep down the federal deficit. It borrows even though it knows that an aging population eventually will cause the retirement program to pay out more money than it takes in.

Viewed one way, the predicament seems manageable: Social Security's projected shortfall, its trustees say, is no more than 1.89 percent of the nation's annual total payroll over 75 years. Surely that money can be raised somehow.

But viewed as President Bush describes it, the problem seems immense: a gap between revenue and benefits of $11 trillion, stretching into perpetuity.

Bush's proposal to let workers use part of their payroll taxes to buy their own stocks and bonds by itself won't guarantee Social Security's long-term sustainability. Nor does the president claim that it will.

But enacting the plan may allow the government to open the program to other changes, such as benefit cuts for future retirees.

Bush signaled as much with this significant declaration in his end-of-year press conference: "The question is whether or not our society has got the will necessary to adjust from a defined benefit plan to a defined contribution plan."

Robert Bixby, executive director of the bipartisan Concord Coalition, which has long warned about Social Security's problematic future, explains: "In a defined benefit plan, as Social Security is now, each worker has a specific benefit guaranteed to him or her. In a defined contribution plan, the focus is on what the worker contributes and there is no guaranteed level of benefits."

Put another way, workers who make wise or lucky investments could end up with better nest eggs than Social Security now promises. But there would also be an element of risk -- one that does not now exist -- given the chance of bad investments or market downturns that coincide with retirement. Some workers could be left with less income, not more.

Moreover, some fear the reform battle could turn into a shell game with $5 trillion under one of the shells -- money that might vanish if taxpayers take their eyes off the game. That is the value that the Social Security Trust Fund will attain, in payroll taxes and interest, over the next 14 years.

As noted, taxes that workers and employers pay into the program each year far exceed the total of benefits paid out -- currently, by over $100 billion. These surpluses have run for 20 years, and will continue until 2018, when the growing numbers of retiring baby boomers cause payments to outstrip revenues.

As also noted, the government now uses the Social Security surplus to offset the federal budget deficit. And that fact reveals a little-recognized, but politically explosive truth.

For two decades, a portion of the overall tax burden has been shifted from the wealthiest Americans to middle- and low-income Americans.

Think of it this way: Without the surplus in the Social Security Trust Fund, the government would have had to cut spending or raise money by other means -- presumably the income tax.

Americans earning $112,000 a year or more pay 71.7 percent of all income taxes, but only 30.6 percent of all payroll taxes, according to the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, both Washington think tanks. For the these taxpayers, it's a good deal to have general government expenses -- everything from defense costs to Congressional salaries -- paid with payroll taxes.

But 79 percent of American households pay more in Social Security taxes than in income taxes. For them, the transfer is a bad deal.

If the government fulfills its obligation to pay off the debt to the trust fund, it can pay full Social Security benefits until 2042.

Where would the U.S. Treasury get the money to pay off the bonds? It already faces annual deficits as far as the eye can see. Bush has pledged to cut the deficit in half by 2009, and the obligation to Social Security makes that task more difficult.

Some argue that the Treasury could simply sell new bonds to the public to redeem the notes now held by the trust fund. That, however, introduces another problem.

Right now, the money is merely a bookkeeping entry, an IOU in which the United States promises to pay itself back. But when the government goes into the credit markets to raise capital, the amount becomes debt with an adverse impact on the economy. Interest rates would rise, making it more expensive for individuals to finance houses, automobiles or credit card debt and for corporations to finance expansion.

But many experts fear that Social Security "reformers" simply have no intention of repaying the trust fund debt. Instead, they caution, the IOU may be pushed indefinitely into the future -- meaning that the billions raised in payroll taxes but spent on other purposes would never make it into the pockets of retirees.

"My guess is we will end up fixing Social Security in incremental ways such that the (trust fund) either remains flat or grows over time," said Robert Reischauer, president of the Urban Institute and former director of the Congressional Budget Office. "The necessity of getting it back won't be there.

"If push came to shove, Social Security beneficiaries and all of us with some interest in the system would say this is a problem for the rest of the government, not Social Security," Reischauer added. "Social Security built up those reserves through tax payments and interest on those payments, and the system is due those resources."