In his State of the Union address last night to Congress, President Bush made Social Security reform his major domestic priority. I enthusiastically applaud the President in this regard. One of the keys will be whether or not he can persuade the public, especially in light of the Democrats’ misleading campaign of opposition.
Analysis of what Social Security is, and what problems we will face in 2018, can quickly become complicated. Fortunately, two experts have put together a very understandable and persuasive article. Brian Riedl is the Grover M. Hermann fellow in federal budgetary affairs at The Heritage Foundation, and David C. John is a senior research fellow for Social Security at The Heritage Foundation. Although published in November, their article takes on new significance and should be required reading.
You can read the original article online, but in what follows, I’ve broken it down with a number of questions. The questions are supplied by me; all of the answers are theirs.
Why does President Bush want Congress to make Social Security reform a top priority?
Because the program is in real trouble—worse trouble than most politicians and a surprising number of reporters are willing to admit.
Although Social Security will fall into deficit in 2018, won’t the program’s trust fund make up the shortfall, delaying any tax increases or benefit cuts until 2042?
There is a trust fund, but it has no money in it—and it never did. No money has ever been saved for future retirees.
But I thought Congress and the President were “raiding the trust fund”?
As inventive as politicians are, even they can’t steal money that was never there in the first place.
Then how are Social Security benefits funded?
Since 1940, the Social Security benefits received by retirees have been funded by the payroll taxes that workers pay. As long as there are enough workers to pay all the benefits owed to current retirees, the system is fine.
So what’s going to change?
Today, there are just 3.3 taxpayers for each retiree. This is a sharp drop from 1950, when there were 16 taxpayers per retiree. In order to work properly, Social Security needs about three taxpayers per retiree. But with millions of baby boomers about to retire, and a much smaller number of new workers, by 2018 the program will have fewer than three workers per retiree and begin spending more each year than it takes in. That number will keep dropping until, around 2030, there will be two workers per retiree. At that point, a married couple will have to support themselves, their children—and their very own retiree.
Supposedly, that’s where the “trust fund” comes in. Although it has existed since the 1930s, it got a new purpose back in 1983, when the Greenspan Commission came up with an idea to pay for baby boomers’ future retirements by raising the Social Security tax well above the amount currently needed to fund the program, and putting the extra money in the trust fund. Between 2018, when the program begins running a deficit, and 2042, the trust fund is expected to provide $5.7 trillion, about $100,000 per family, to pay benefits.
Sounds like a good plan—what’s the problem with it?
The federal government wasn’t allowed to actually save this money. Since 1939, federal law has required Social Security to “invest” its extra money in Treasury bonds. In other words, the government lends the money to itself. Those funds are then mixed in with all other tax revenue and spent on programs such as education, foreign aid and defense.
So in 2018, when the Social Security program tries to redeem these bonds, the Treasury (having already spent that money over the previous 35 years) won’t be able to repay Social Security from any pre-existing store of cash. Taxpayers will be forced to pay extra taxes in order to fund Social Security’s 40 million retiring baby boomers.
How about an illustration?
It’s like a family that borrows money from its retirement fund each year to pay for vacations and expensive dinners. When they finally retire, their retirement fund consists of nothing more than paper IOUs.
But isn’t the empty trust fund caused by budget deficits?
The Social Security surplus is spent each year regardless of whether the budget is in surplus or deficit. When the federal budget is in deficit, the Social Security surplus funds current government programs. When the budget is in surplus, the Social Security surplus pays down the national debt. Either way, nothing is saved for future retirees.
The demographics are already set. All of the taxpayers who will exist in 2018 have already been born. One way or the other, Social Security will need extra money starting that year.
What choice then does the USA have?
It can either condemn future generations to ever-higher taxes or sharply lower Social Security benefits, or it can change the system by allowing younger workers to place part of their taxes in safe, controlled investments. That will cost money also, but the money in those accounts would be really saved—and grow into pools of money that could pay some of the owner’s Social Security benefits.
However, before we can make that choice, we have to stop being distracted by thoughts of trust funds—especially ones that really have no money in them.
