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Response to Amy Eunice


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    


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