The Coming Train Wreck That Is Social Security
July 20, 2001
Beginning in 2016, Social Security's payroll tax revenues will fall short of benefit payouts. The deficit will grow to about $12 trillion by 2050, according to the draft interim report of the president's Social Security commission released yesterday. By 2075, the system will have an accumulated shortfall of $47 trillion (in 2001 dollars).
The draft report presented to the commission says the basic options to deal with Social Security's financial problems are to cut benefits, raise taxes, increase government debt, reduce spending on other programs -- or allow individuals to prefund some of their retirement benefits with personal investment accounts.
- If payroll taxes are raised starting in 2016, by 2030 a family with an income of $50,000 (in today's dollars) would face a $2,100 tax hike.
- Similarly, if benefits were cut, a couple with an $18,945 annual benefit in 2030 will face a $4,605 benefit cut.
The Social Security Trust Fund has a balance of about $1 trillion. But the balance is merely an accounting entry. It's a promise by the federal government to pay excess payroll tax revenues -- which have been used to fund other government spending -- back into the system.
Furthermore, although Social Security was structured to give low-income workers proportionately more benefits than higher income workers, it is already far less redistributive than it might appear -- for several reasons.
- Low-income workers tend to have shorter life-spans than those in higher brackets and so collect benefits for shorter periods; and spousal benefits accrue more often to higher-income workers because poorer workers are more likely to be single or divorced.
- Also, benefits are not paid unless a worker qualifies by staying in the labor force for 10 years -- which disqualifies a disproportionate share of lower-income workers.
- Thus, for example, African-Americans receive nearly $21,000 less on a lifetime basis from Social Security's retirement program than whites with similar income and marital status.
The benefits workers receive compared to lifetime Social Security taxes paid -- the rate of return or interest on taxes -- has fallen and will continue to fall, due to previously enacted benefit cuts and tax increases. Accounts personally owned and invested in stocks and bonds could earn a much higher rate of return.
Source: Staff Draft, "Interim Report of the President's Commission to Strengthen Social Security," July 18, 2001; Kevin A. Hassett (American Enterprise Institute), "Social Security Reform Can't Wait," Wall Street Journal, July 20, 2001.
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