Government Spending on the Elderly: Social Security and Medicare

Studies | Federal Spending | Health | Social Security

No. 247
Friday, November 30, 2001
by John C. Goodman and Matt Moore


Options for Using the Social Security Surpluses

Social Security will run annual surpluses from now until 2016. There are two primary options for using these surpluses. First, the funds could continue to be spent or used to pay down publicly held debt, which is now happening under current law. The second option is to invest the surpluses in assets. This second approach would create a partially-funded system that would be integrated with the current pay-as-you-go system, creating essentially a two-tiered approach to provision of retirement security.

On the positive side, paying down the debt allows the government to avoid making interest payments. However, this option does nothing to solve the long-term demographic and structural problems of the system. NCPA Senior Fellow and Social Security Trustee Thomas S. Saving, along with colleagues Andrew J. Rettenmaier and Liqun Liu of Texas A&M University's Private Enterprise Research Center, have calculated the long-term consequences of this approach:29

  • By 2012, all publicly held federal debt will be paid off.
  • But because all of Social Security's structural problems will remain, the government will have to start borrowing again by 2022.
  • By 2029, the U.S. will have the same debt as it does today.

At that time, the government will have to make a decision: Keep borrowing or raise taxes:30

  • If the government keeps borrowing, by 2050 it will have four times more debt than if the surplus were used to finance personal accounts.
  • If the government raises taxes, then by 2050 the payroll tax will have to rise 7.2 percentage points to 19.6 percent.

By contrast, if the Personal Retirement Account (PRA) plan is adopted, the debt will be roughly the same as today and payroll taxes will be about the same as under current law. If the Social Security surplus is used to fund PRAs, the payroll tax will have to be increased only 0.1 percentage point to 12.5 percent.31 This is possible because future retirees will draw an increasing amount of their retirement benefits from their personal accounts and the government's Social Security expenditures will be reduced.


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