How should Social Security be reformed?
August 5, 1998
in this forum:
Is there really a social security crisis? Is privatizing the only alternative we have to raising Social Security taxes? What risks do you see with privatization? What are the advantages of privatization? What happened to all of the money collected in the past?
Jeff Kohan of Boston, MA, asks: Is there really a social security crisis?
Henry Aaron of the Brookings Institution responds:
Here are the facts. Social Security reserves now total approximately $700 billion. The Congressional Budget Office projects that Social Security revenues will exceed expenditures over the period 1998-2008 by a total of $1.6 trillion dollars. Even if the law were unchanged, projected revenues are sufficient to pay 100 percent of benefits for the next 33 years. From that point on, revenues would cover 75 percent of revenues. Over the next seventy-five years, projected revenues are approximately 16 percent below projected outlays.
Imagine that you and your extended family were saving to support your own retirement. Suppose also that you had sufficient revenue to meet all your family's retirement costs for the next 33 years and could meet 75 percent of those costs indefinitely bills thereafter. If someone described that situation as a "crisis," you would think that person was unfamiliar with basic meaning of English words. If you were prudent, however, you would not sit on your hands. You would promptly initiate gradual changes to close your projected deficit. Early action, you would realize, would avoid the larger and more difficult steps that might be necessary if you procrastinated.
That is exactly what Congress should do with respect to Social Security—enact promptly the modest adjustments that will suffice to close the projected long-term deficit.
A crisis? No way. A need for radical action? Hardly. A projected long-term deficit? Yes, and a time for careful thought and gradual, prudent reform.
Carolyn Weaver of the American Enterprise Institute responds:
In Washington, "crisis" is a politically loaded word, so I'll choose my words carefully. There is no crisis if by that you mean any immediate risk to benefits for the 44 million people now receiving social security. There certainly is a crisis, however, in the more general sense that the social security system is seriously underfinanced and can not, without significant reductions in currently promised benefits or significant increases in the payroll tax, continue to pay full benefits to all current beneficiaries as well as pay promised benefits to middle aged and younger workers when they reach retirement. There is a crisis in the sense that older people worry about whether social security will see them through retirement and younger people wonder whether there will be anything there for them at all. There is a crisis in the sense that the 77-million strong baby-boom generation begins moving into retirement just a decade from now, leaving precious little time to get changes in place that generate enough savings quickly enough to close the long-range gap. And there is a crisis in the sense that as long as workers are left in the dark about what social security will or won't offer in the decades ahead, they can not possibly make sound decisions about how much to save, how much insurance they need, or when to retire.
Some people say "relax, there's plenty of time to deal with the problem" and they point to the Social Security Board of Trustees' Report, which shows that benefits can be paid until 2032. There are two problems with concluding that we can be complacent. First of all, more often than not, the Trustees' projections turn out to be too optimistic. The financing problem may be much more serious than now assumed. Second, even if the Trustees' projections were on target, if Congress waits a decade or two to act, it will have fewer options from which to choose and the impact on workers and beneficiaries will be much more adverse. For example, if Congress did nothing until 2030, it would have to cut benefits immediately and across-the-board by 25% to bring spending back into line with available resources, with bigger cuts to follow. That would push many retirees into poverty and cause unnecessary disruptions in the work, saving, and retirement plans of the millions of workers nearing retirement. If low-wage workers and people already on the benefit rolls were to be protected, the reductions would have to be much larger.
Furthermore, if Congress is going to allow workers to establish personal retirement accounts, as I hope and expect it will, the sooner those accounts can be established and workers can start reaping the benefits of real investment, the better off workers will be. The potential loss of income and wealth, due to legislative inaction, is real and large.
Clearly, the sooner Congress acts, the better for all concerned.