Few people seriously dispute that Social Security is in need of reform. The surge in retirees in the near future from the baby boom generation will cause a surge in benefit payments from the system, and in just 15 years the system will be paying out more in benefits than it collects in taxes. By 2042 the so-called Trust Fund will be exhausted and Social Security will only be able to pay 73 percent of promised benefits to retirees.
While there is no disputing that reforms must be introduced soon, there is substantial debate as to what any reform should entail. The most popular reform option involves the introduction of individual accounts of some sort that workers would own, control, and be able leave to their heirs.
Opponents of individual accounts advocate increasing payroll taxes to cover projected Social Security deficits, but the price tag is steep. A recent report by the Congressional Budget Office estimated that the proposed payroll tax increases would shrink the U.S. economy by $87 billion per year by 2025. Combined with the fact that President Bush has firmly declared that he would oppose any increase in payroll taxes, individual accounts are the main reform option on the table.
There is a real chance for reform in 2005. The president has been consistent throughout his first term in highlighting the need for reform and his commitment to allow younger workers to invest a portion of their Social Security payroll taxes through individual accounts that they would own and control. Social Security reform was a major domestic policy issue of his re-election campaign, and his recent rhetoric on the subject indicates to everyone that it will be his chief domestic issue on his agenda.
The Nature of Private Accounts
Due to the nature of the pay-as-you-go system, where the taxes collected from current workers are used to pay for the benefits of current retirees, the initial diversion of money to private accounts would need to be funded through spending cuts or borrowing.
Deficit hawks tend to choke when they see the price tag for introducing individual accounts could require around $2 trillion or so over the next decade. In reality, the number that they should focus on is the $11.9 trillion needed for the current Social Security system to become and stay solvent.
The $2 trillion “transition cost” is not a new cost; it is simply turning an implicit cost, future promised benefits, into an explicit one. It is akin to refinancing a mortgage and paying down some of the principal today to lessen the monthly payments in the future.
The recent White House Conference on the Economy was a great platform to build legislative support. Not a few lawmakers are concerned about increasing our nation’s borrowing in an era of large deficits, and are wary of the possible 2006 mid-term election repercussions of such a plan.
At the conference, Bush acknowledged this predicament and sought to counter it by sending a message that reforming the system will “send a message not only to the American people, but we’ll send a message to the financial markets that we recognize we have an issue with both short-term deficits and the long-term deficits of unfunded liabilities to the entitlement programs.” Reforming the system now is actually fiscally responsible.
At the same time, the introduction of private accounts would give today’s workers new confidence in Social Security. In a country where a majority of the population does not believe that they will ever receive any money from Social Security, changing this perspective is necessary to save the system. With individual accounts every worker would have a vested interest in a growing economy.
If we are serious about reforming the system, we must do so immediately. Every year we wait gives us less time to accumulate capital that we can apply towards the reform. If we wait until the system is in deficit, as some suggest, reform without drastic benefit cuts or payroll tax increases will be next to impossible.
The President has stated repeatedly that Social Security reform would be at the top of his domestic agenda. As we are waiting to hear more from the president on Social Security reform in his inaugural and State of the Union address, it is necessary to remember that reforming the system is not merely an option anymore. We cannot afford not to reform the system - it is the fiscally responsible thing to do.