Before the Flood: Bracing for Social Security Surge

Social Security remains the nation’s most popular and most successful domestic program. It has helped to slash the poverty rate among the elderly, provided a safety net for millions of disabled workers and eased the financial burdens of the survivors of deceased workers. Soon, though, Americans and their elected officials must decide on what changes they are prepared to accept to assure the program’s continued effectiveness.

By now, most people know that unless changes are made Social Security might not be able to meet its long-term responsibilities. In less than 15 years the oldest members of that historic demographic bulge known as the baby-boom generation--the 76 million Americans born between 1946 and 1964--will become eligible for full Social Security benefits. When the youngest boomers retire, around 2030, fully 20% of Americans will be over the age of 65.

Contrary to what many believe, individual workers do not pay Social Security taxes into separate accounts to be drawn on after retirement. If that were the case, most would exhaust their benefits long before they died. Benefits for today’s retirees instead come from taxes collected from today’s workers. The problem is that the number of retirees is growing even as the pool of workers shrinks. Today, there are nearly five people in the labor force for each person over 65. But by 2030 there will be fewer than three workers for each person over 65.

Social Security receipts typically exceed expenditures, with the surplus going into a trust fund that can be invested only in U.S. government securities. Reserves in the old age part of the trust fund now total $459 billion. But as the ratio of workers to retirees changes, receipts will begin to lag behind outlays. First the interest earned by the trust fund and then the principal itself might have to be tapped to make up the difference. By 2030, the trust fund could be exhausted.

How much of a shortfall might develop after that is uncertain. The trustees of the fund, required by law to make impossibly long-term projections of economic growth, have been properly cautious. They assume a growth rate over the next 75 years below the rate of the last 35 years. Based on that conservative estimate, they project the system will fall out of balance by an amount equal to 2.19% of “covered payroll,” the portion of the nation’s total payroll that is subject to Social Security taxes. A higher rate of economic growth, which is entirely possible, could wipe out the shortfall. But for now, the challenge is to find more certain ways to eliminate that projected 2.19% gap.

Among the more sensible and feasible ideas proposed for keeping Social Security healthy well into the next century:

--Continue raising the yearly cap on earnings (now $62,700) to which the flat 6.2% Social Security payroll tax may be applied.

--Make the system more universal and increase revenues by bringing in the 3.7 million state and local government workers who now contribute to other plans.

--Raise the age of eligibility for full benefits, in recognition that life spans have increased significantly since the system began in 1935. At the same time, compute a retiree’s benefits on the basis of a more realistic 38 years in the labor force, instead of 35. Including the earliest years of lower-paid employment would somewhat reduce monthly benefits.

--Most controversially, invest part of the trust fund in stocks, which have historically produced a greater return than investments in government securities. Several proposals for such a shift deserve study and discussion.

Social Security reform isn’t a partisan issue; with 43 million Americans drawing benefits and 95% of the work force contributing to the system it can’t be. But it is a system whose long-term solvency is in question. What’s needed now is a consensus on the changes to be made to deal with the problem.