RE: Sorting out the issues

[National Dialogue Moderator <moderator>]

Ms. Eunice:

Social Security -- the way it runs, how the money flows, and why it is in trouble -- can be a very complicated issue. I sensed some frustration in your email, so let me try to illustrate why Social Security is troubled using demographic trends:

• People are living longer and thus drawing benefits for many more years than originally anticipated. In 1935, the average life span was 61 years. Today, it is 75 years and by 2025, people will live to an average age of 78 years. As such, people are living much longer in their retirement years, and collecting Social Security for more years than expected by the program's actuaries.

• Families are smaller, consequently there are fewer workers to support current retirees. Parents are having fewer children today than they were many years ago. For example, in the 1940s, a family with 4-5 children was not uncommon. Today, the typical family has 1-2 children. These children are the workforce of tomorrow, and these workers will be the ones supporting tomorrow's retirees. Because people are having fewer children, there are fewer workers to support current reitrees. In 1950, there were 16 people working and paying taxes to support a single retiree. Today, there are only three workers per retiree and by 2030 there will be only 2 workers supporting every retiree.

• The Baby Boom generation is nearing retirement. Between 2010 and 2030, 76 million Baby Boomers will retire and begin collecting Social Security, and by 2030 there will be twice as many people over age 65 than there are today.

• People are retiring earlier and working less. In 1940, the average age at retirement was 69 years. Today, the average age at retirement is 62 years.

Based on these facts alone, it should be easy to see that changing demographics are threatening the financial stability of the Social Security program. If you'd like more information, read on...

In March 1999, the Trustees of the Social Security Trust Fund issued their annual report on the financial status of the Social Security program. Currently, Social Security is running an annual surplus - the program is collecting more revenues than it needs to pay benefits. This will not continue for long, however. According to the Trustees, in 2014 the cost of providing benefits to our nation's retirees will exceed the taxes collected to support the program. Simply put, Social Security will begin running sizable deficits. The attached chart (not currently available) illustrates this fact.

What happened to the surpluses? Weren't they deposited into the Social Security Trust Fund? By law, the Social Security Trust Fund is permitted to hold only one type of asset: special Treasury bonds. They are called "special" because they are not tradable on the open market and are redeemable at any time. When Social Security runs a surplus, the Trust Fund purchases "special Ts" from the Treasury. Treasury then uses the surplus revenues to finance non-Social Security government spending (education, transportation, defense, etc.) or pay down debt held by the public. Last year, surplus revenues were used to retire debt.

The notion that the Social Security Trust Fund is a true pension trust fund - where individual contributions are earmarked, invested, and saved for your retirement - is false. Social Security never was meant to be -- and never has been -- a fully funded pension program. Rather it is a pay-as-you-go program, a contract between generations. Today's workers pay taxes to support today's retired beneficiaries knowing that the generation that follows them will do the same.

When Social Security's costs exceed revenues, the only "asset" in the Trust Fund is a pile of IOUs - the "special T's" mentioned above. In 2014, when the program begins running deficits, the Social Security Administration will need to redeem these IOUs from the US Treasury. Options for generating the cash needed by Treasury to redeem these IOUs are limited: raise taxes, cut benefits, issue additional debt or redirect spending from other programs (education, transportation, defense, etc.). Redemption of these bonds will extend the life of Social Security to 2034, at which point Social Security will be able to pay only 72% of benefits promised if no changes are made. This would mean a 28% benefit cut for everyone retiring after 2034.

Although my answer is lengthy, I hope you have a better understanding of the problem after reading it (if not, I have failed and will try again!). Keep searching for answers!

-- Jim Kolbe