March 21, 2005
By David C. John
Like a Roman
Legion advancing against its enemy, Social Security's future
problems approach slowly, but their arrival is inevitable. Rome's
legions lined up behind a wall of shields that moved slowly across
battlefields with a discipline that few others possessed. Enemies
did not know the exact moment when the legions would reach them,
and the slaughter would begin, but once the process started, its
outcome was seldom in doubt.
future problems are equally predictable, even if their exact timing
is uncertain. As millions of baby boomers approach retirement, the
program's annual cash surplus will shrink and then disappear. Then,
Social Security will not be able to pay full benefits from its
payroll and other tax revenues. It will need to consume
ever-growing amounts of general revenue dollars to meet its
obligations-money that now pays for everything from environmental
programs to highway construction to defense. Eventually, either
benefits will have to be slashed or the rest of the government will
have to shrink to accommodate Social Security.
The exact timing
of this crunch is less important than its inevitability. Whether
Social Security begins to spend more on paying benefits than it
receives in taxes in 2018 or 2019 or any other specific year means
much less than what these deficits will mean to our economy. Our
children may be faced with the choice of paying retirement benefits
to their parents or paying for programs that help their own
children. That future is coming, and no amount of wishful thinking
will change that.
The reason that
Social Security's deficits are inevitable is fairly simple.
Demographics are more predictable than most events. Millions of
baby boomers will begin to retire in 2008, when those born in 1946
reach Social Security's early retirement age of 62. From then until
2025, every year will see another crop of baby boomers reach the 62
year-old threshold. Because the baby boomers have not produced
enough children to replace themselves, the number of taxpaying
workers will shrink.
do not change rapidly. It takes about 25 years to grow a new
taxpayer. We can estimate with surprising accuracy how many people
born in a particular year will live to reach retirement. The
retirees of 2070 were all born in 2003, and we can see and count
This is critical,
because a retiree's Social Security benefits are actually paid from
the taxes of those who are still working. The program's finances
are based on the relationship between the number of workers paying
taxes and the number of retirees receiving benefits.
Back in 1950, as
the baby boom was just getting started, each retiree's benefit was
divided among 16 workers. Taxes could be kept low. Today, that
number has dropped to 3.3 workers per retiree, and by 2025, it will
reach-and remain at-about two workers per retiree. Each married
couple will have to pay, in addition to their own family's
expenses, Social Security retirement benefits for one retiree. In
order to pay promised benefits, either taxes of some kind must rise
or other government services must be cut.
This future is
coming with steady speed. Social Security's annual cash surpluses
will begin to fall in 2008, the same year that the first baby
boomers reach early retirement age. Over roughly the next 10 years,
those Social Security surpluses, about $100 billion a year at their
peak, will continue to shrink and then disappear completely.
Without those surpluses to reduce the size of the federal deficit,
Congress will have to raise taxes to bring in billions of dollars
of new revenues, cut programs, or let annual deficits climb.
And then the real
problems hit. Somewhere around 2018, on top of replacing Social
Security's $100 billion annual surplus, Congress will have to find
billions more so that Social Security can pay all of the benefits
that it has promised. Within about five years, that additional
money will reach $100 billion a year (not counting inflation). From
there, the annual demands will reach first $200 billion a year, and
soon $300 billion a year.
Then there is
Medicare. Together, Social Security and Medicare will consume an
estimated 60 percent of income taxes collected by 2040. What's left
would have to finance the entire rest of the government.
So if this the
next Social Security trustees report shows that the 2018 date has
changed-as it has in past reports-that is much less important than
what happens once the inevitable deficits begin. Sadly, even if the
year that the problems begin changes, the total amount of
additional money that Social Security will need will still
Social Security's future is inevitable, like it or not. We can
either prepare now, or dither about what year it will happen.
Wishful thinking did not stop the Romans, and it will not prevent
Social Security's problems either.
John is Research Fellow in Social Security and Financial
Institutions in the Thomas A. Roe Institute for Economic Policy
Studies at The Heritage Foundation.
What year the deficits start matters less than the deficitsthemselves.
David C. John
Senior Research Fellow in Retirement Security and Financial Institutions
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