In 2012, just 15 years from now, Social Security will begin running a deficit, spending more on benefits than it brings in through taxes. In theory, the Social Security system will then begin tapping the Social Security Trust Fund to pay benefits until 2029, when the trust fund will be exhausted. In reality, however, the trust fund is little more than an accounting gimmick. There is no money in the trust fund — only government bonds, a form of IOU. Redeeming the bonds to pay benefits after 2012 will require a huge tax increase on young workers.
Moreover, even this projection may easily prove unduly optimistic. A major economic downturn or a major medical breakthrough could speed Social Security’s collapse. Under some projections, Social Security could begin running a deficit as early as 2006.
Anyone sanguine about the future of Medicare and Social Security should take a look at a new report on the aging of America from two scholars at the University of Chicago. Charles Mullin and Tomas Philipson examined data from the annuity and life‐insurance market to make projections about future increases in longevity. Their conclusion: Americans are likely to live much longer than previously predicted. Indeed, they suggest that longevity could increase as much as 5 percent faster than previously estimated.
While this is good news for those of us who can expect to live to a ripe old age, it is bad news for those who would delay Social Security reform. People who live longer will draw more Social Security checks and deplete the system faster. But the impact of delaying reform will hit young workers hardest. They could earn far higher retirement benefits if they could invest their Social Security taxes in private capital markets. Indeed, most young workers will actually receive a negative rate of return from Social Security — less money back in benefits than they pay in taxes. In contrast, private capital markets have produced average annual returns of nearly 10 percent over the past 60 years.