Response to Amy Eunice
- Date: Thu, 27 May 1999 16:12:14 -0400 (EDT)
- From: National Dialogue Moderator <moderator>
- Subject: Response to Amy Eunice
- Contributor: PANELIST: Senator Rick Santorum
Thank you, Amy, for asking your very important question. One of the
reasons that there seems to be multiple "sides" to the Social
Security reform debate is that the program and its financial
operations are somewhat complex, and it is easy to gloss over the
very serious problems by looking at only certain facets of Social
Security's future.
I hope I can help you and other participants understand what the issues
are in clear, straightforward language. Some of this may be repetitive,
as my colleagues Senator Gregg, Congressmen Kolbe and Stenholm have
commented on these issues before and they share particular expertise on
Social Security financing.
As you probably know by now, Social Security is a "pay-as-you-go",
demographically driven program -- current workers pay taxes which go
directly to paying benefits to current beneficiaries. Right now, the
program is taking in more money than is required to pay benefits.
But that won't last for long. The primary reason is demographic: our
growing population of longer-living seniors is quickly outpacing the
workers who support them. The first baby boomers -- 76 million of
them -- will start retiring and drawing Social Security benefits in
2008. By 2025 the number of people age 65 and older is predicted to
grow by 75%. In contrast, the number of workers supporting the
system would grow by only 13%. As a result, the ratio of workers to
recipients is expected to fall from 3:1 today to less than 2:1 in
2035.
Because we are living longer and spending more years in retirement,
and as the baby boomers begin retiring (and cease paying taxes into
the system -- currently they are at their peak earning power), the
Social Security trustees have projected that the costs of the program
will keep increasing and the revenues will not increase as quickly --
leaving the system severely underfunded by nearly 40% over the
long-term.
At the time Social Security was created, retirees had not
contributed toward newly-created benefits. They, like successive
cohorts of retirees, depended on the contributions of workers.
Initially, because the number of beneficiaries is small relative to
the number of contributing workers, contribution rates were able to
remain low. But as more and more retirees collect benefits (unless
the number of contributors grows sufficiently -- which it is not),
Social Security's tax rate has to increase to support larger
aggregate benefit payments.
Now a lot of the debate seems to center around whether Social Security
begins its trouble in the next 15 years or the next 35. This has to
do with how you look at the Social Security trust fund.
For some time now, the extra payroll taxes coming in to the government
that are not needed to pay Social Security benefits have been
accounted for separately through the issuance of bonds to the Social
Security trust funds -- which basically involves a series of
bookkeeping entries by the Treasury Department -- but the trust funds
themselves do not hold money. The government essentially borrows
these surplus Social Security taxes and issues it an "IOU" to be paid
back, with interest, in the coming time of need. They are simply
accounts. Similarly, benefits are not paid from the trust funds, but
from the treasury. As the checks are paid, securities of an
equivalent value are debited from the trust funds.
Generally speaking, the federal securities issued to any federal trust
fund represent "permission to spend." As long as a trust fund has a
balance of such securities, the Treasury Department has legal
authority to keep issuing checks for the program.
So the Social Security trust fund currently has a build-up of more
than $800 billion -- this represents past "borrowed" and spent Social
Security taxes and annual interest that the federal government
credits to the trust fund for borrowing that money.
The critical date for Social Security happens, however, when the
system's payroll taxes cease to be able to cover benefits -- in 2014.
Interest paid to the funds is simply an exchange of credits among
government accounts. It is not a resource for the government -- only
the system's taxes are. Thus, it is in 2014 that other federal
receipts would be needed to help pay for benefits. If there are no
other surplus receipts, policymakers would have three choices: raise
taxes, cut spending, or borrow the needed money.
So it is important that we are clear here: Social Security's Trust
Fund is only an accounting device -- it contains no real economic
assets with which to pay benefits, and merely represents Social
Security's "claim" on future government general revenues. Senator
Gregg and Congressmen Kolbe and Stenholm have been instrumental in
saying that the Social Security Trust Fund is only an asset to Social
Security to the exact same degree that it is a liability to the rest
of government. They have also been instrumental in brining to light
a passage from President Clinton's own budget submission, but I think
it is worth repeating in full:
"[The Social Security Trust Fund] does not consist of real economic
assets that can be drawn down in the future to fund benefits.
Instead, [it is] a claim on the Treasury that, when redeemed, will
have to be financed by raising taxes, borrowing from the public, or
reducing benefits or other expenditures. The existence of a large
trust fund balance, therefore, does not have any impact on the
Government's ability to pay benefits."
-- Office of Management and Budget, Fiscal Year 2000 Budget of the
United States Government, Analytical Perspectives, page 339
Some observers often cite the statistic that Social Security's
AVERAGE imbalance is about 2% of taxable payroll (over 75 years).
What really matters is Social Security's operating balance -- that
is, the annual difference between its outlays and its earmarked tax
revenues. Under current law, this balance is due to turn negative in
2014 and widen to an ANNUAL deficit (i.e., above and beyond the
revenues provided Social Security through current payroll taxes) of
some $860 billion, or 5 percent of payroll, by 2034, the last year the
trust funds are technically "solvent." Even if the 2 percent solution
were enacted, Social Security would still face large and steadily
growing operating deficits starting in 2021. All the 2 percent
solution would accomplish is to postpone Social Security's first
operating deficit by several years -- from 2014 to 2022 or so. After
that, the trust funds would only remain solvent by cashing in an even
larger mountain of paper IOUs. The 2% "fix" would not eliminate the
need for the federal government to raise additional taxes during the
baby boom draw down years. Those unfunded costs on our children and
grandchildren would remain, however redistributed among payroll taxes
and general taxation.
So as to recap, "solvency" is largely a choiceless exercise, and is
perhaps the easiest means by which to measure Social Security's
financial health. Any solution must not only meet a solvency test for
75 years and beyond, but it also must deal with the huge annual cash
flow deficits that begin in 2014. Under President Clinton's plan, for
example, the 2014 date is not pushed back by one single day. On paper,
by swapping publicly held debt for additional debt held by the trust
fund, there appears to be 40 years more life injected into the Social
Security program. But from where is the government to get the $7-8
trillion above and beyond payroll taxes needed to provide benefits from
2014 - 2034? I do not believe that President Clinton has explicitly
answered this question. If he has, please forgive me, as I must have
missed something in his plan.
One other associated point bears mentioning in measuring the
effectiveness of Social Security reform plans. We have been
discussing to what degree various plans put Social Security on sound
financial footing. By law, the Social Security Trustees are only
required to look at the next 75 years (what the actuaries call the
valuation period). This begs the question: "What happens in the 76th
year? The 77th? (etc.)." As mentioned before, the nip-and-tuck
approach tends to look at the "actuarial" balance of Social Security
for the next 75 years, which lends itself to the half-story that
Social Security is "only" 2% (again, on average) out of balance. What
this story won't tell you is that even if we were to raise payroll tax
rates today by 2%, additional payroll tax rate increases would be
needed each year to keep the system in balance for the next 75-year
period. That is because the change of the valuation period adds a
new, expensive 75th year and drops a year when benefit costs were
relatively cheaper.
I hope this explanation was useful. Admittedly, some of this is
repetitious, but I think necessary in order to get the full picture of
Social Security's enormous financing problems.
Senator Rick Santorum