If the president is serious about fixing Social Security’s many problems, he should follow his own call for “bold experimentation and offer Americans a new retirement system based on individual ownership and private investment.
Social Security’s problems begin with a looming financing crisis. The date most often cited in public debate is 2029, the year in which the Social Security trust fund will be exhausted. But focusing exclusively on that date is misleading. The implication is that the system will be fine until 2029, at which point benefits will suddenly stop. The reality is much more complex.
Currently, Social Security taxes bring in more revenue than the system pays out in benefits. The surplus theoretically accumulates in a trust fund. Beginning as early as 2012 — as the first wave of baby boomers confront retirement — the situation will reverse and the government will begin paying out more in benefits than it collects in revenues. To continue meeting its obligations, it will have to begin drawing on the surplus in the trust fund. At that point we will discover that the fund is little more than a polite fiction. For years, the federal government has used the trust fund to disguise the size of the federal budget deficit — borrowing money from the fund to pay current operating expenses and replacing the money with government bonds.
Beginning in 2012, the Social Security Administration will have to start turning in those bonds to the federal government to obtain the cash needed to finance benefits. But the federal government has no cash or other assets with which to pay off the bonds. It can obtain the cash only by borrowing and running a bigger deficit, increasing taxes or cutting other government spending.
Even if Congress can find a way to redeem the bonds, the trust fund surplus will he exhausted by 2029. At that point, the government will have to rely solely on revenue from the payroll tax. But that revenue will not he sufficient to pay all promised benefits. Either payroll taxes will have to he increased to at least 18 percent, a 50 percent increase over today’s 12.4 percent tax rate, or benefits will have to be slashed.
These problems are a result of Social Security’s fundamentally flawed design, which is little more than a government‐sponsored pyramid scheme. Today’s benefits to the older are paid by taxes from the younger, who are still working. Tomorrow’s benefits to today’s young are to he paid by tomorrow’s taxes from tomorrow’s young. Because the average recipient today takes out more from the system than he or she pays in, Social Security works only as long as there is an ever‐larger pool of workers paying into the system compared with beneficiaries taking out of the system.