February 2, 2005

February 2, 2005 | Commentary on Taxes

Rising Benefits Threaten Social Security

Even if Congress doesn't allow workers to invest part of their Social Security taxes in private accounts, it will have to address a growing problem with Social Security: The system is heading into bankruptcy, largely because future retirees are being promised much more money than current retirees are.

Today, Social Security consumes 4.28 percent of the economy. It sends checks to nearly 48 million people, and average earners receive about $15,000 per year from the national pension program. Within 20 years, it will pay more than $19,000 -- on average -- to 84 million retirees and consume nearly 6 percent of the economy. And by 2055, it will pay out $25,000 to retirees who earned average wages.

At first, we think: Of course. Social Security benefits are supposed to keep pace with inflation. But it turns out that the numbers in the previous paragraph already are adjusted for inflation. In other words, future retirees are being promised much larger benefits compared to what current retirees receive.

Rising benefit levels are a fiscal time bomb for Social Security. Within 75 years, Social Security's deficit will reach $27 trillion -- or more than $100,000 for every working household in America at that time.

Part of the problem is, of course, a huge demographic shift brought on by the retirement of the 77-million-strong baby boom generation, which begins in three years, and by quantum leaps in life expectancy brought on by improvements in medical science and diet. In 1935, the average 65-year-old could expect to live about 12.6 more years. By 2040, a 65-year-old can expect to live another 19 years.

But a large part of Social Security's fiscal crisis comes from these unnecessary increases in benefits. They place a burden on the economy that will lead to economic decline. (See much of western Europe, particularly France and Germany, where aging populations and huge government outlays for them have led to economic stagnation and double-digit unemployment.) Also, these increases encourage workers not to save for their own retirements but to rely on a program that was designed as a safety net, not as a sole source of income for retirees. Even most opponents of President Bush's plan admit that Social Security faces huge long-term deficits, and those deficits will only worsen if the increased benefit levels aren't addressed.

Fortunately, policy-makers can lighten the load on future generations by making changes to the way future retirement benefits are calculated. Making these changes now will allow workers to better plan for the future. Besides, reform will be much more difficult and expensive if we wait.

Current retirees and those close to retirement, perhaps age 55 and above, should receive every cent they are promised. They fulfilled their obligations, and it would be unfair to change their benefit levels now and ask them to build additional private savings or develop alternate sources of income for retirement.

It does make sense, though, to adjust the growth of younger workers' retirement benefits. There is no reason why future retirees should receive substantially more income -- adjusted for inflation -- than current retirees. And those more than 10 years from retirement have plenty of time to adjust.

Several nations already have undertaken similar reforms. Some, such as Britain and Sweden, have slowed the growth of benefits as part of an overall reform that includes personal retirement accounts. In other cases, such as Germany, rising benefit levels are being curtailed solely as part of a cost-saving exercise.

One thing is certain. If we make no effort to control costs, Social Security will hit a fiscal brick wall in the not-too-distant future. Today's policy-makers should protect future retirees from that crisis.

Daniel J. Mitchell is the McKenna fellow in political economy at  The Heritage Foundation.

About the Author

Daniel J. Mitchell, Ph.D. McKenna Senior Fellow in Political Economy

Related Issues: Taxes

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