Washington recently went into one of its periodic spasms of shock and indignation because of Federal Reserve Chairman Alan Greenspan’s (search) comments that Social Security cannot continue to pay its promised level of benefits with its currently projected levels of revenue.
Greenspan was not saying anything new. But politicians of every stripe reacted as if he had announced that the sun was about to stand still in the sky.
Now, the Social Security (search) system’s trustees have released their latest report on the program’s finances and once more reaffirmed the truth of Greenspan’s statements. In doing so, the trustees offer us another opportunity for an honest debate about how to reform Social Security and ensure that our children and grandchildren will have the opportunity for a safe, secure retirement.
The Trustees confirm that Social Security will begin to run a deficit by 2018, just 14 years from now, and the same date as in last year’s report. Thus, while politicians dithered and tried to pretend the issue would go away, we moved another year closer to disaster. But the truly frightening numbers are found further into the report, and make clear the magnitude of the fiscal train wreck awaiting us.
The figure most cited in the media is the "present value" of Social Security’s unfounded liabilities, $3.7 trillion, which represents the amount needed to cover shortfalls after the Trust Fund is exhausted in 2042. An additional $1.5 trillion would be needed to redeem the bonds in the trust fund, for a total unfounded liability of $5.2 trillion, on a present value basis. Present value calculations are an important number for economists and actuaries—they show the amount the government would have to set aside today (assuming it earned standard interest rates) to pay all promised benefits in the future. But, of course, the government cannot set aside $5.2 trillion today. That would be nearly half of our Gross Domestic Product (search).
Therefore, a better measure of Social Security’s financial crisis is its actual cash deficit: the total amount that its expenditures will exceed its revenue from 2018 on. Measured in constant 2004 dollars, that shortfall is an astounding $26 trillion—$26,000,000,000,000.00.
To put this in context, in 2018, the first year that Social Security will run a cash deficit, that shortfall will be approximately $16 billion, or roughly the equivalent of the current budgets for Head Start and the WIC nutritional program. In another two years, Social Security’s shortfalls will nearly exceed those two programs, plus the Departments of Education, Commerce, Interior, and the Environmental Protection Agency. By 2030 or so, you can throw in the Departments of Energy, Housing and Urban Development, and Veterans Affairs. And the biggest deficits would be still to come.
Or, if you would rather look at it in terms of taxes, in the first year after Social Security starts running a deficit, the government must acquire revenues equivalent to nearly $200 per worker. By 2042, the additional tax burden increases to almost $2,000 per worker, and by 2078 it reaches a crushing $4,200 per worker (in constant dollars). And it continues to rise thereafter. Functionally, that would translate into either a huge increase in the payroll tax, from the current 12.4 percent to as much as 18.9 percent by 2078, or an equivalent increase in income or other taxes.
And all of this doesn’t even begin to consider Social Security’s other problems: a poor and declining rate-of-return for younger workers; issues of fairness for minorities and working women; the impact on wealth creation; and the lack of legal ownership and control over one’s benefits.
The American people would be right to hope, therefore, for an open and honest debate over how Social Security should be reformed. So far, however, they would be disappointed.
President Bush has been willing to discuss Social Security reform, at least conceptually. He would allow younger workers to privately invest a portion of their Social Security taxes through individual accounts. But, so far he has been unwilling to put any political capital behind such proposals. And, he has been maddeningly short of details on issues such as how big private accounts should be, or how he would finance short-term cash shortfalls during the transition to individual accounts.
Bush’s Democratic opponent, Sen. John Kerry, has so far defined his position primarily by what he is against. Campaigning in Florida, Kerry told a group of seniors, "I will never privatize Social Security. Never, never, never!" Kerry went on to say that he would never support any cuts in Social Security benefits either. "Not me. Not my party. Not ever." That’s all very well—but then what is he for? As former President Bill Clinton pointed out, there are only three options for Social Security reform: raise taxes, cut benefits, or invest privately. Kerry seems to be taking benefit cuts and private investment off the table. Does that mean he supports tax increases? If so, he isn’t saying.
At a time when politicians can expend so much time and energy on issues ranging from who gets married to the use of steroids in baseball, wouldn’t it be nice for them to give us some straight forward answers about the ticking time bomb of Social Security?
Michael Tanner, director of the Project on Social Security Choice at the Cato Institute, is the editor of the new book, "Social Security and Its Discontents" (Cato Institute, 2004).