Social Security's Problems Haven't Gone Away

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The Social Security system's trustees have released their annual report on the system's finances and announced that—surprise—the program's looming financial crisis hasn't gone away. In fact, the faltering economy has made things worse.

Social Security will begin running a deficit by 2016, meaning that just seven years from now the program will begin spending more money on benefits than it takes in through taxes. That's one year sooner than last year's report.

Of course, in theory, the Social Security Trust Fund will pay benefits until 2037. That's not much comfort to today's 37-year olds, who will face an automatic 26 percent cut in benefits unless the program is reformed before they retire. But even that figure is misleading, because the Trust Fund contains no actual assets. The government bonds it holds are simply a form of IOU, a measure of how much money the government owes the system.

Even if Congress can find a way to redeem the bonds, the Trust Fund surplus will be completely exhausted by 2037. At that point, Social Security will have to rely solely on revenue from the payroll tax—and that revenue will not be sufficient to pay all promised benefits. Overall, the system's unfunded liabilities—the amount it has promised beyond what it can actually pay—now total $17.5 trillion. Yes, that's trillion with a 'T.' That's $1.7 trillion worse than last year.

Moreover, Social Security taxes are already so high, relative to benefits, that Social Security has simply become a bad deal for younger workers, providing a low, below-market rate-of-return. In fact, many young workers will end up paying more in taxes than they receive in benefits. They will actually lose money under the program.

Critics of personal accounts for Social Security have pointed to the decline in the stock market over the last few years as an argument against allowing younger workers to privately invest a portion of their Social Security taxes. Yet studies have shown that long-term investment remains remarkably safe. If workers retiring today had been allowed to start privately investing their taxes 40 years ago, they would obviously have less money than those who retired a couple of years ago. But they would still have more than Social Security promises.

Moreover, as the new Trustee's Report shows, the same poor economy that hurts the stock market hurts Social Security's ability to pay its benefits.

And, all of this doesn't even begin to deal with the single most important problem with the current Social Security system--workers have no ownership of their benefits. This means that workers are left totally dependent on the good will of 535 politicians to determine what they will receive in retirement.

Social Security is the largest government program in the world, accounting for 23 percent of the federal budget. The Social Security tax is the largest tax that the average American family pays. Indeed, nearly 80 percent of Americans pay more in Social Security taxes than they do in federal income tax. And, millions of seniors depend on social Security for their retirement income. Yet the program is unsustainable. It cannot pay future benefits without drowning our children and grandchildren in a sea of debt and taxes.

In the end, there are only three possible solutions to Social Security's problems. Taxes could be raised (and the Social Security payroll tax would have to be nearly doubled to keep the program afloat). Benefits could be cut. Or younger workers could be allowed to invest privately.

We can have an honest debate about which of those options is the best choice. But, as the Trustee's Report makes clear, Congress and the Obama administration cannot continue to duck the issue.

Michael Tanner
Project on Social Security Choice
1000 Massachusetts Ave., NW
Washington, DC 20001
Phone: 202.842.0200
Fax: 202.842.3490
socialsecurity@cato.org