Tuesday, March 08, 2005
Social Security Reform is a Now Issue
My blog post on “Why not Retirement Choice?” was published in my local newspapers and got some comments back that reflected political opposition and substantial confusion and mis-information about the basic facts of the current Social Security system. So I wrote this item to explain the facts and to show why SS Reform is a “Now” issue.
Let’s start by understanding the 2 versions of “PayGo”. In a budget sense, it means don’t spend more than your income and keep debt down – a good goal for national as well as household budgets. Unfortunately, that’s not what it means in the social security system. There it means today’s workers pay taxes for today’s retirees benefits in exchange for a promise that tomorrow’s workers will pay for their retirements. That promise is a huge unfunded obligation (a debt) that keeps growing. This “PayGo” system means pay now and borrow against the future. It creates an affordability crisis now because longevity and demographic trends show we will soon have only 2 workers to support each retiree.
For 20 years, surplus FICA taxes have been spent and special bonds issued to the Trust Fund. There are no assets in the fund; just a record of the size of government obligations (i.e. Debts) due to collecting and spending too much tax. According to SSA figures, that debt is $1.7Trillion now and will reach $3.5Trillion by 2018, at which time we will need $23Billion more than the FICA tax collects to pay benefits that year – and more each year thereafter. At that point, we must raise taxes, borrow more or cut benefits.
That’s part of a real multi-Trillion dollar debt that keeps growing while we delay reform. It’s also why Alan Greenspan recently urged congress to act to reform social security before 2008; that’s right 2008, not 2018. Why then? Because that’s when the baby boom generation can start to retire at 62, beginning a dramatic increase in retirees and social security costs along with a faster reduction in the number of workers to pay benefits. He also endorsed individual accounts as providing real wealth for people while restraining the government from excessive spending. Individual accounts are the only real “lock box”, with no keys in the government’s hands. I think they are an essential part of reform.
Most importantly, they do not create any new debt or require any benefit cuts to existing retirees. During the transition period, they will require earlier funding, or pre-payment, of some of the huge unfunded obligations, an existing debt, already acquired under the current system. These transition “costs” actually reduce the social security debt, since account holders will get less of their future benefits from that source and more from their accounts. It is a matter of paying some existing debt now or paying a lot more later.
There are options and details to be worked to get a viable reform structure. A lot of work has been done already by the SS Bipartisan Commission, which provides the basis for the President’s proposal. But “Delay and Do Nothing” is not a responsible option.
