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Bush Administration Seeks Cure for Social Security

Anyone paying attention to the Social Security system knows that while it is in fair shape right now, its future looks dicey. Absent any changes, outflows will begin to exceed inflows by 2017, according to Social Security Deputy Commissioner and Chief Operating Officer James Lockhart III, and by 2041 the Social Security trust fund will have disappeared. Because we still have not created a savings culture in this country, Lockhart warns, most future retirees will not be able to make up for a Social Security shortfall on their own.

"Doing nothing is not the right answer" to Social Security's ills, Lockhart tells SVIA Forum participants. Unfortunately, he adds, it would not be practical for the federal government to borrow the funds needed to keep Social Security solvent. Over the next 75 years, he says, that would amount to $33 trillion, or five and a half times the current federal debt level.

Lockhart outlines four possible solutions to the Social Security problem:

• Raise payroll taxes,

• Slow or reduce Social Security benefits,

• Transfer money into the program from the government's general account, or

• Increase returns on assets held in the Social Security system by adding a "prefunding" component to the system.

Under this scenario, US workers would be required to make annual payments into personal retirement accounts, where they would have the flexibility to choose their investments.

Prefunding may be the best possible solution, Lockhart says. Increasing payroll taxes is probably unworkable, he argues, because the Social Security tax rate is already quite burdensome at a whopping 12.4% on the first $85,000 of personal income, and would have to be boosted to about 20% to solve Social Security's financial woes. Another 10% increase would be required to ensure Medicare's solvency. "This would increase an already regressive tax," Lockhart says.

Cutting benefits, meanwhile, may not be palatable to the American public. For one thing, Lockhart says, President Bush has vowed that benefits to current Social Security participants won't be cut. "It's really our children and grandchildren who would be at threat," he says.

Finally, it is simply impossible to transfer enough money from the government's general account today to shore up Social Security for the long haul. Doing so, Lockhart says, would require a massive $3.3 trillion transfer on top of the $1.3 trillion the Treasury already owes Social Security (the net present value of Social Security's $33 trillion in benefit promises).

Lockhart says 23 countries already use some form of prefunding. He concedes, however, that the idea has not gained much traction in the US Congress. When might legislators take some action on Social Security? Lockhart says the bipartisan debate has slowed progress on the issue but he is hopeful there would be more discussion on the topic in 2003.

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