History Social Security and Operations

How to address the projected Social Security shortfall, while also maintaining (and even strengthening) the social protections the program offers is one of the most pressing domestic policy issues of the twenty-first century. Even though Social Security is running substantial yearly surpluses ($155 billion in 2000), the long-term financial stability must be addressed.

The most commonly accepted estimates of Social Security actuaries suggest that the program has sufficient funds to meet all its obligations through 2038. After that, its projected revenue stream will be sufficient to pay 72 cents of every dollar promised through 2075 (estimates made in 2000 extend only for seventy-five years). These estimates suggest that tax revenues (payroll tax receipts and receipts from taxation of benefits) will be exceeded by outlays in 2015, but that income from all sources, including interest on trust fund investments in U.S. government obligations, is expected to exceed expenditures through about 2025 (Board of Trustees). After that, timely payment of benefits would require drawing down the assets of the OASDI trust fund until its depletion in 2037. Of course, the size of the actual problem could be larger or smaller. The SSA’s more pessimistic estimates project a shortfall beginning in 2026 that is roughly 150 percent larger than its most commonly accepted estimates. On the other hand, its more optimistic estimates project that the OASDI trust funds can meet all its obligations through 2074.

Theoretically, the long-term financing problem could be addressed by immediately raising the Social Security payroll tax on employers and employees from 6.2 to 7.2 percent, or by immediately reducing all future benefits by about 14 percent. While this provides a sense of the size of the problem, no one is seriously suggesting either approach.

Social Security’s estimated shortfall is not highly disputed, but the perceived implications of the shortfall fuels a lively policy debate (see Aaron and Reischauer; Peterson). Conflicting approaches to reform reflect differing views of the extent to which individuals, rather than the national community, should be responsible for preparing for their retirement, disability, or survivorship. The traditional view emphasizes providing widespread and adequate protection as Social Security’s fundamental purpose. Hence, stabilizing financing while assuring adequate benefits that are not subject to erosion by inflation, business cycles, and market fluctuations are central reform concerns. Strong commitment exists for the moderate redistribution inherent in the benefit structure as a means of assuring that those who have worked for many years at relatively low wages will have minimally adequate incomes. In contrast, those seeking to shift Social Security towards a more private savings model draw on their strong belief in individual responsibility, limited taxation, and freedom of choice. They tend to emphasize maximizing rates of return and shrinking the role of government. While safeguards may be built in for some of the most disadvantaged, these proposals tend to be most beneficial to persons with higher earnings. For instance, most women would not fare well under a privatized retirement income savings program because women tend to have more intermittent work histories and lower earnings, and they live longer.

As in the past, incremental changes in benefits and financing can effectively address the projected financing problem. The large annual surpluses projected through about 2020 provide an opportunity to buy down the federal debt, arguably strengthening the economy in preparation for the retirement of the baby boomers. If the savings from interest the government would otherwise have to pay on the federal debt were then transferred to the Social Security trust funds (essentially a general revenue transfer after 2036), the program would be able to meet its obligations through about 2050. Diversification of trust fund investments, allowing for a small portion of the trust fund assets to be invested by an independent board in a broad selection of private equities, could help address the program’s financing while also improving rates of return. There are many other proposals which, if done in moderation, would not greatly compromise the fundamental purposes of the program. These include raising the ceiling on wages subject to the payroll tax, increasing the normal retirement age, bringing the rest of state and local government employees into the program, small payroll tax increases, a technical adjustment in the COLA, and other small benefit reductions. As in the recent past, such changes will not be pain-free. But, given the larger goal of assuring financial stability of this popular program, the public is likely to accept such changes, especially if the burdens of change are viewed as being distributed equitably.

Because OASDI provides widespread protection across all income classes, and because it is especially important to low- and moderate- income groups, it is especially important to carefully assess the distributive implications of various policy options. Certain changes, such as COLA reductions or retirement age increases, especially if done in the extreme, will have a more deleterious effect on low-income persons who rely more heavily on Social Security for their retirement income. Also, in the context of reforming Social Security’s financing, it will be important to explore what can be done to improve the benefit for persons who continue to be at financial risk during their old age. For example, many women, especially divorced or very old widowed women, are very much at risk today, and, absent changes, this will also be the case for future cohorts of older women (Smeeding, Esters, and Glasse).

Too often, media, politicians, and analysts have reduced Social Security discussions to mere accounting exercises about the financial cost of the program, overlooking the benefits this program provides and the real consequences of possible changes to the well-being of individuals and families. Social Security is an institution that has strengthened the nation’s families and communities. As Social Security continues to evolve, it will be important to not lose sight of the moral dimension of a program that gives expression to and reinforces the values that hold us together as a nation and a people.