Figure 1
Social Security's Payroll Tax Surplus or Deficit
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
2003 2009 2015 2021 2027 2033 2039 2045 2051 2057 2063 2069 2075
Source: 2003 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability
Insurance Trust Funds, table IV.B1.
the government must acquire revenues equiva-
Fund balances, therefore, does not by itself
As Bill Clinton
lent to $197 per worker. By 2042, the additional
have any impact on the Government's abil-
ity to pay benefits.3
tax burden increases to $1,976 per worker, and by
pointed out,
2078 it reaches an astounding $4,193 per worker
the only way
(in constant 2003 dollars).7 And it continues to
Even if Congress can find a way to redeem
to keep Social
the bonds, the trust fund surplus will be com-
rise thereafter. Functionally, that would translate
pletely exhausted by 2042. At that point, Social
into either a huge increase in the payroll tax, from
Security
Security will have to rely solely on revenue
the current 12.4 percent to as much as 18.9 per-
solvent is to
from the payroll tax--but that revenue will not
cent by 2077, or an equivalent increase in income
or other taxes.8
raise taxes, cut
be sufficient to pay all promised benefits.
Overall, Social Security faces unfunded liabili-
benefits, or
ties of nearly $26 trillion.4 Clearly, Social
get a higher
Security is not sustainable in its current form.
A Declining Rate of Return
rate of return
There are few options for dealing with the
problem. That opinion is held by people who
Social Security taxes are already so high, rel-
through
are not supporters of individual accounts as
ative to benefits, that Social Security has quite
private capital
well as by those who are. As former president
simply become a bad deal for younger workers,
investment.
Bill Clinton pointed out, the only way to keep
providing a low, below-market rate of return.
Social Security solvent is to (a) raise taxes, (b)
As Figure 2 shows, that return has been steadi-
cut benefits, or (c) get a higher rate of return
ly declining and is expected to be less than 2
through private capital investment.5 Henry
percent for most of today's workers.
The poor rate of return means that many
Aaron of the Brookings Institution, a leading
young workers' retirement benefits will be far
opponent of individual accounts, agrees.
lower than if they were able to invest their pay-
"Increased funding to raise pension reserves is
roll taxes privately.9 On the other hand, a sys-
possible only with some combination of addi-
tional tax revenues, reduced benefits, or
tem of individual accounts, based on private
increased investment returns from investing in
capital investment, would provide most work-
higher yield assets," he told Congress in 1999.6
ers with significantly higher returns. Those
higher returns would translate into higher
The tax increases or benefit cuts would have to
retirement benefits, leading to a more secure
be quite large. To maintain benefits in the first
retirement for millions of seniors.
year after Social Security starts running a deficit,
3