In other words, we must take the same painful financial steps, and to the same degree, whether we have a trust fund or we do not have a trust fund. But how big a problem are we looking at?
First consider how much we’d have to raise taxes to repay trust fund bonds and maintain Social Security’s solvency. Assuming income tax revenue maintains its current share of GDP, we must raise income taxes 7.1% across‐the‐board by 2020, 12.9% by 2025, and 16.7% by 2030. If you still think the trust fund is an “asset,” you won’t when your taxes are paying it off.
Alternately, we could reduce Social Security benefits so no trust fund bonds need be redeemed. Doing so, however, would leave millions to retire in hardship. A low‐income retiree needs to replace almost 90% of his pre‐retirement income. Today, Social Security replaces just 53% of such a retiree’s income and leaves him some 15% below the poverty line. If benefits are limited to affordable levels, by 2020 a low‐income retiree’s replacement rate falls to 50% , and to just 41% by 2035.
We could cut other government spending to make room for Social Security, but even die‐hard conservatives might flinch at what’s involved. Assuming that both total federal spending and existing programs grow at the same rate as GDP, in 2016 Social Security’s payroll tax deficit will equal 0.7% of projected federal spending. That would require eliminating relatively small programs, like Head Start and the National Science Foundation. In 2020 payroll tax deficits will top $225 billion, around 4.5% of projected spending. So add the departments of State, Education, Commerce and Energy to the hit list. Plus the Environmental Protection Agency. By 2030, Social Security deficits will equal about 9% of federal spending, so scratch the departments of Labor and Veterans Affairs as well. And remember, this is before the “fund” runs out.
If tax hikes and spending cuts won’t work, can’t we just borrow the money? Well, by 2020 we will have borrowed $585 billion to cover Social Security’s deficits; by 2025, $2.7 trillion; and by 2030, $7.1 trillion. By 2075 the debt‐to‐GDP ratio from Social Security alone would exceed that following World War II. And because Social Security’s funding problems never end, these debts will never be repaid.
Are these tax increases, spending cuts or borrowing a “crisis?” Perhaps not in the sense that World War II was a crisis, but Social Security poses a formidable challenge nonetheless. The alternative is to pre‐fund Social Security, using today’s projected budget surpluses to finance the transition to personal retirement accounts. Younger workers can invest their payroll taxes in stocks and corporate bonds earning return multiples higher than Social Security, while the surplus maintains benefits to current retirees. By saving and investing now we can get ahead of the game.
Reform opponents use the trust fund to justify a “Don’t worry, be happy” approach. But if we don’t start worrying now, we’re going to be extremely unhappy later. An unreformed Social Security system will bury Americans beneath mountains of tax hikes, spending cuts and debt. A better option is to let workers invest their payroll taxes in personal accounts they own and control, turning Social Security from a political football into a generator of real wealth and real peace of mind to workers and retirees alike. But the key to this better future is to act today, when large budget surpluses make it so much easier. Opportunity may not knock twice.