SOCIAL SECURITY: Its Problems and How to Solve Them

Abstract

Social Security is now running a cash surplus. The surplus will grow smaller when the baby boomers begin to retire, and it will turn into a cash deficit by 2017. Soon afterwards, Social Security’s trust fund will begin cashing in the government IOUs that it holds. By 2041, these IOUs will be exhausted in the course of paying promised benefits. At that point, if nothing else is done, Social Security will have enough revenue to pay only 70 percent of its promised benefits. Put another way, a payroll tax rate of about 19 percent— instead of today’s 12.4 percent—will be needed to pay the program’s scheduled benefits starting in 2041.In 2001, President George W. Bush appointed a commission to recommend solutions to Social Security’s looming financial problems. This article summarizes the commission’s report and my own views as a member of that commission. The President’s Commission to Strengthen Social Security reached three conclusions:1. Prefunding Social Security obligations with private, competitive control over the funds leads to higher benefits and enhances long-term sustainability.2. A system of personal retirement accounts (PRAs) can be constructed as part of Social Security and can be run with low administrative costs and moderate risk.3. A key choice confronting the nation is whether to maintain scheduled contributions (payroll taxes) and lower the wage replacement rate (benefits) or to maintain the scheduled replacement rate by finding additional revenue. Using PRAs improves the terms of this tradeoff but does not completely eliminate it.1