During the war in Iraq, the government issued warnings of potential terrorist attacks that included a disaster‐preparedness checklist urging citizens to have duct tape and plastic sheeting to seal doorways and windows to protect themselves.
I’m all for advance planning and disaster‐preparedness. And that’s why I’m still waiting for the government to raise its disaster alert level to “orange” or perhaps even “red” on Social Security. While lives are not at stake, an unreformed Social Security system could threaten our economic security in several ways.
First, Social Security’s structure as a pay‐as‐you‐go program — wherein taxes paid by today’s workers provide benefits for today’s retirees — saves nothing for the future. Surplus dollars are “invested” in special issue Treasury bonds (resulting in the so‐called Trust Fund) to cover financial obligations in other parts of the government or to reduce the outstanding publicly held debt.
Second, Americans are living longer than when the Act was signed into law in 1935. Today, life expectancy at birth is 15 years longer than it was 70 years ago, and people who reach age 65 should live to celebrate at least their 82nd birthday.
Third, families are having about half as many children than during the baby‐boom years, meaning that there are fewer and fewer workers to support the growing base of retirees. In 1945, the ratio of workers to retirees — the principal measure of a pay‐as‐you‐go system’s financial viability — was 41.9 to 1. Today, the ratio is about 3.4 to 1 and is expected to be just 2 to 1 within 30 years, creating an even greater burden on American workers.
Without making any changes, the inevitable result from these “attacks” on Social Security is insolvency. Within 15 years, tax income for Social Security will fall short of outlays. By 2042, the Social Security Trustees project the Trust Fund to be exhausted, with expenditures exceeding tax income by 27 percent.
So, can duct tape fix Social Security?
Duct tape may work wonders as a momentary patch, but not as a permanent solution.
Few alternatives exist to solve the growing problems with Social Security, and mostly, only “duct tape solutions” have been proposed. The most obvious are those that advocate raising taxes and/or reducing benefits without making any modifications to the program’s pay‐as‐you‐go structure. To make Social Security solvent over the next 75 years, either a permanent 15 percent increase in payroll income taxes, or a 13 percent reduction in benefits, or some combination of the two would be required. If we wait until the program is on the brink of bankruptcy, the payroll income tax rate would need to increase by 4.5 percentage points (to about 16.9 percent) and gradually increase until it is more than 50 percent higher than today’s rate.
A permanent fix is needed…one that preserves Social Security’s benefits for current retirees (and those very near retirement), and also gives individuals — particularly younger workers — greater control over and choice of their retirement options. But like any permanent fix, certain expenses are necessary. And the costs are likely to get much higher the longer temporary repairs remain in place.
Personal account plans, such as those put forward by the President’s Commission to Strengthen Social Security, are not duct tape solutions. To the contrary, personal account plans can provide higher long‐run benefits and lower long‐run costs than the current unsustainable program. Moreover, personal accounts allow workers to own and control a greater portion of their retirement savings, as well as the ability to pass on these savings as an inheritance.
The Social Security problem is not going away. Bold, prompt, and corrective action is needed on this issue of economic security. Temporary duct tape solutions cannot save a system that is flawed in its very structure and facing demographic trends that are strongly working against it. Indeed, Congress should give Social Security a permanent fix by allowing workers to redirect some of their payroll taxes into individually owned, privately invested retirement accounts.