To protect future generations, fix Social Security

Aspen Gorry & Sita Slavov American Enterprise Institute
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In his State of the Union speech, President Obama urged Congress to “act soon to protect future generations.” He was talking about addressing environmental issues. But there’s an easier, more obvious step we can take to improve the lives of our children and grandchildren. We can act now to fix Social Security.

Restoring Social Security to long-run solvency is a straightforward task that would greatly benefit future generations as they plan for retirement.

The problem is simple. Without reform, Social Security is unsustainable. The unsustainability of the program arises from the fact that the ratio of workers to retirees has fallen considerably, and will continue to do so in the future. In 1950, there were 16.5 workers for each Social Security recipient. Today, there are just 2.8. The Social Security trustees project that on current trends, the Social Security trust fund will be exhausted in 2033. At that point, the revenue coming into the system will be sufficient to fund only about 75 percent of benefits.

While there is widespread agreement that something will eventually need to be done about Social Security, some policymakers and economists have expressed the view that this isn’t a pressing matter. After all, the program will remain solvent for another decade, and the economy is currently weak.

But addressing the Social Security shortfall is a pressing matter. That’s because delay increases the size of the bill we pass on to our children and grandchildren, and it generates uncertainty for the next generation as they plan for retirement.

The policy choices boil down to basic arithmetic: to make Social Security solvent, we need to raise the payroll tax rate or cut promised benefits. There are no other options.

The Social Security trustees estimate that we can keep Social Security solvent for the indefinite future if we immediately raise the payroll tax rate by 4.1 percentage points or cut promised benefits for current and future retirees by 23.3 percent.

More likely, we could choose a combination of tax increases and benefit cuts, exempting current retirees and people close to retirement from the cuts. Reform could also include cutting benefits more for high-income individuals than for low-income individuals.

Regardless of which option we choose, the longer we wait, the bigger the tax increase or benefit cut that will be required. Acting now allows us to spread the adjustment burden over more generations.

For example, suppose we decide to close Social Security’s funding shortfall by raising the payroll tax. Taking immediate action will mean that today’s 60-year-old workers will share the burden, paying higher taxes over the remaining years of their careers. But if we wait until 2033, many of today’s 60-year-olds will have retired, exempting them from any payroll tax increase.

A similar argument applies to benefit cuts. Immediately cutting promised benefits for workers aged 55 and younger means that today’s 50-year-olds can be part of the solution. Waiting until 2033 means that today’s 50-year-olds will be exempt from bearing any burden. That burden will then be passed on to younger generations.

In addition, waiting to fix Social Security generates uncertainty for today’s workers about their retirement. They know that current benefits are unsustainable, but they don’t know whether the problem will be fixed with higher taxes or lower benefits. As long as there is uncertainty about the shape that reform will take, individuals will be unable to make sound decisions about their own savings and retirement.

Some rightfully claim that Medicare is a bigger problem than Social Security. However, rising Medicare spending is a more complex and difficult problem. Fixing Medicare’s finances requires addressing health care cost growth — a tricky issue that is subject to a great deal of uncertainty. In comparison, the demographics that drive Social Security costs are easier to predict, and the options for reforming Social Security are well known.

A major theme in President Obama’s State of the Union speech was that “this country only works when we accept certain obligations to one another and to future generations.” In other words, each generation should bear its fair share of the burden of government. Reforming Social Security now is an easy step toward that goal.

Aspen Gorry is a research fellow at the American Enterprise Institute, where Sita Slavov is a resident scholar.