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Social Security 101

Just about everybody concedes that the Social Security program is in trouble. Within 12 years, says Michael Tanner, director of the Cato Institute's Cato Project on Social Security Choice, it will start taking in less money through payroll taxes than it pays out in benefits. By 2041, it will be legally and financially unable to pay promised benefits. At that point, Congress will have only three options: allow benefits to be cut by 25 percent or more, increase Social Security payroll taxes to meet the promised obligation, or borrow to meet the obligation.

The magnitude of the problem is staggering. Social Security is already the single biggest item in the federal budget, Tanner said at SVIA's Forum. Without any changes, he said, Social Security will account for 29 percent of the budget by 2020 and 34 percent by 2030. "By the middle of the century," he said, "the entire budget would be Social Security, Medicare, Medicaid, and interest on the national debt. There would be, for example, no defense spending."

But the Social Security problem is much more immediate than that, Tanner warned. While the "Social Security Trust Fund" will allow the program to meet its full obligation from 2017 through 2041, he noted, that trust fund merely consists of government bonds-debt the government owes itself. "The only way to turn those IOUs into cash is to raise taxes, cut spending or borrow," he said. "Those are the same choices we'd face if there were no trust fund at all. That is why non-partisan analysts generally agree that Social Security's financing problems begin with the payroll tax deficits in 2017, not when the trust fund runs out in 2041." As early as 2027, Tanner added, the federal government would have to redeem $220 billion in bonds from the trust fund to pay that year's Social Security benefits.

As if all this weren't bad enough, Tanner also argues that Social Security's payout system is flawed, often discriminating, albeit not overtly, against working women, divorcees, African Americans and younger Americans. The real rate of return on the public's Social Security "investment" had been falling for all retirees for a long time, he said, from 1.13 percent for a single male with median wages born in 1970, for example, to 0.86 percent for that same single male born in 2000. The illustration assumes no change in the law and retirement at age 65. This decline has occurred despite repeated increases in Social Security payroll taxes, from 2 percent in 1937 to the 12.4 percent rate that's been around since 1990.

Because the problems facing the Social Security system are so monumental, Tanner warned there will be no easy solutions. Unfortunately, he said, debate on the issue thus far has been short on facts and high on rhetoric, emotion and fear-mongering, leading to much confusion among the public. "Every Congressman, and every American, needs to learn about Social Security, the problems it faces and the solutions that have been proposed," he said. "Doing nothing isn't an option. Without action, benefits will eventually be cut by more than 25 percent. If you don't have a reform plan, you're for benefit cuts, because that's what the law prescribes."

Tanner argues in favor of President Bush's proposal to allow American workers to invest at least part of their Social Security contributions into private accounts-even if it won't do anything to make Social Security more solvent-citing research indicating that people who feel they have an ownership stake in their investment program do a better job of managing it. In fact, he said, a good first step would be to rebate to workers the Social Security payroll taxes they're paying in now that exceed current benefit requirements, so they could reinvest that money on their own. That, he conceded, would boost the budget deficit by about $70 billion a year, but he argued that it also might provide some much needed discipline for federal legislators who have been pushing the federal deficit higher and higher in recent years. "If Congress is going to spend like a drunken sailor," he said, "you have to take the bottle away from them."

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