Social Security's Woes Are Worse than You Think

August 31, 2012

America's debt problem stems from the continued growth of entitlement spending and no proper effort to rein it in. Policy circles emphasize the need to make changes to Medicare to make it sustainable, whereas Social Security is put on the backburner. This is because in the long-run, Medicare will be a bigger problem to the debt than Social Security, says Ramesh Ponnuru, a senior editor at National Review

But it is important for policymakers to take a look at possible solutions to Social Security, because if left unchecked, it too can become unsustainable and ruin the economy.

  • In 1983, the financing gap for Social Security over the next 75 years was 1.8 percent of payroll.
  • Today, the financing gap stands at 3.5 percent over the next 75 years.
  • Furthermore, by 2035, Social Security will cost 6.4 percent of the economy while Medicare will cost 5.7 percent.
  • By that point, Social Security costs are set to peak because the demographics will play out while Medicare costs go up.
  • According to the Congressional Budget Office (CBO), by 2025, public debt will reach 106 percent of the gross domestic product (GDP).
  • Even worse, by 2035 -- the year Social Security costs are said to peak -- public debt will reach 181 percent.

The nation's finances will be tanked before Social Security costs peak. However, there are possible solutions to Social Security that can prevent future debt problems.

  • First, increase the retirement age. This would encourage people to work longer and continue paying into the system.
  • Second, the growth of benefits can be reduced, especially for high-income earners. In the status quo, high earners who retire in 2040 will receive higher benefits than those who retire in 2020. The proposed plan would keep the benefits the same, adjusting for inflation.
  • Moreover, the Democrats' plan to raise taxes would discourage people from working and saving, according to the CBO.

Source: Ramesh Ponnuru, "Social Security's Woes Are Worse than You Think," Bloomberg, August 27, 2012.

 

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