08Nov2011

Sustainable Social Security

by Bradley M. Smith, 2011-12 SOA President

Social Security was designed as a pay-as-you-go system.  The 1983 reform resulted in increased taxes and decreased benefits to assure the 75 year “solvency” of Social Security.  The resultant tax revenue in excess of benefit payments “accumulated” in the Social Security Trust Fund.  The federal government “borrowed” this excess revenue to pay current expenses.  It also contributed to a reduction in the government’s current deficit and external debt. Nonetheless, the federal government owes this money to the Social Security Trust Fund which now sits at approximately $2.6 trillion. In the near future, absent reform, Social Security benefit payments will permanently overtake Social Security tax revenue, resulting in an increase in the government’s current deficit calculated on a unified basis.

Given the level of the government’s deficit this has led some politicians to call for the reform of Social Security.  However, we know that any reform of Social Security will not affect the government deficit over the long run as Social Security taxes must be used to pay Social Security benefits.  It is a zero sum game. 

Likewise, once the “trust fund” is dissipated and the taxes collected are no longer adequate to pay scheduled benefits, benefits will be reduced to the level supported by then-current tax revenue.  This is primarily due to the demographic shift generated by the retirement of the baby boomer generation.

Most actuaries understand this.  The general public does not.

Reform is necessary, not to help address the deficit issue, but to distribute the pain of some combination of increased taxes and reduced benefits more equitably to all tax-paying generations.  Absent such reform, the generations paying taxes through the mid 2030s (and later receiving the reduced benefits) will bear the economic brunt of this demographic shift.  Steve Goss, the Chief Actuary of Social Security, and his staff have done an excellent job of detailing the issue.  The actuarial profession needs to support their efforts to better educate the tax-paying public and lawmakers so that we can create a system that is fair to all.

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Discussion

3 responses to "Sustainable Social Security"

  • Caterina Lindman says:

    Can you help me understand your comment, “Reform is necessary, not to help address the deficit issue, but to distribute the pain of some combination of increased taxes and reduced benefits more equitably to future generations.” As I understand it, from the first part of your statement, Social Security has a surplus, because prior contributions were greater than prior benefits. The only problem is that this money was lent to the government, and it (ie. the citizens of the USA) need to pay it back. So why wouldn’t the government raise taxes (in an equitable manner, perhaps based on ability to pay) to pay back the Trust Fund?

  • Brad Smith says:

    Caterina,

    Funds generated through the payment of federal income taxes and through external borrowing will be the primary sources used to pay back the amount borrowed by the federal government from the Social Security Trust Fund. Absent reform of Social Security payments to beneficiaries are projected to drop by approximately 23 percent in the mid 2030’s. Consequently, the need to reform Social Security is driven by a desire to treat different tax paying generations equitably by spreading the pain associated with the projected drop in benefits to all tax paying generations. This would be accomplished by some combination of reducing benefits and raising taxes before the projected drop in benefits occurs. Hope this helps.

    Brad

  • Caterina Lindman says:

    Brad,

    I’m not really sure I understand, but I do thank you for your reply. I’d like you to help me understand your statement that “Absent reform of Social Security, payments to beneficiaries are projected to drop by approximately 23 percent in the mid 2030’s.” In your original column you said, “Likewise, once the “trust fund” is dissipated and the taxes collected are no longer adequate to pay scheduled benefits, benefits will be reduced to the level supported by then-current tax revenue.” By the “trust fund” being dissipated, do you mean that the Federal Government would be paying back the trust fund, and this money, plus Social Security taxes will be less than the benefits? And because the Social Security benefits are less than the Social Security Revenue, benefits have to be reduced?

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