The Real Problem With Social Security
June 17, 2002
According to June O'Neill, former Congressional Budget Office director, public discussion about Social Security that centers on "lock boxes" or whether the Social Security trust fund is being "raided" is irrelevant. Worrying about the size of the trust fund is misguided. Social Security's real problem is that it is a pay-as-you-go program, which draws on the taxes of current workers to pay benefits for current retirees.
- The federal government has no mechanism to save today's funds for the future.
- By 2016, when Social Security begins running annual deficits, the trust fund will be credited with more than $5 trillion; but the trust fund does not hold assets that can be sold for cash.
- To pay benefits in 2016 and beyond, the federal government must acquire additional resources through tax increases, cutting other spending or borrowing.
O'Neill also notes that Social Security surpluses have led to more government spending than would otherwise have been the case. Social Security surpluses have provided the government with a source of current revenue, which has been used to buttress government spending on other programs outside of Social Security.
To cover the costs of the program into the future, payroll taxes would have to rise by 50 percent (an 8.5 percentage point increase) to cover costs at mid-century. The alternative is to prefund retirement benefits through a system of individually held private accounts.
Source: June O'Neill, "The Trust Fund, the Surplus, and the Real Social Security Problem," SSP No. 26, April 9, 2002, Cato Institute.
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