March 24, 2005

March 24, 2005 | Commentary on Social Security

Social Security's Inevitable Future

The new Social Security trustees report, showing that the program will begin to spend more in benefits than it takes in from payroll taxes starting in 2017 instead of 2018, reinforces the need for Congress to get started with a serious effort to fix the system. The time of partisan rhetoric and obstruction is over.

Since last year, the cost of fixing Social Security has climbed by more than $500 billion. In 2004, Social Security estimated that it would require $5.2 trillion invested immediately to repay the trust fund and pay full benefits for 75 years. This year, that estimate has grown to $5.7 trillion. 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 didn't know exactly when the legions would reach them and the slaughter would begin. But the outcome was seldom in doubt.

Social Security's future problems are equally predictable. As millions of baby boomers retire, the program's annual cash surplus will shrink and then disappear. Then, Social Security won't 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, absent reform, we'll have to either slash benefits or shrink the rest of the government to accommodate Social Security.

Think what those deficits would mean to our economy. Our children might have to choose between paying retirement benefits to their parents or paying for programs that help their own children.

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. Meanwhile, because the boomers haven't produced enough children to replace themselves, the number of taxpaying workers will shrink.

Demographic trends 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 them today.

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 depend on the relationship between the number of workers paying taxes and the number of retirees receiving benefits.

Back in 1950, each retiree's benefit was divided among 16 workers, so we could keep taxes 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 its own family's expenses, Social Security retirement benefits for one retiree. In order to pay promised benefits, either taxes must rise or government services must be cut.

This future is coming with steady speed. Social Security's annual cash surpluses will begin to fall in 2008. Over roughly the next nine years, those Social Security surpluses, about $100 billion a year at their peak, will continue to shrink and then vanish. 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. In 2017, 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 the benefits 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.

Without reform, Social Security's future is inevitable, like it or not. We can either prepare now or waste time with more empty talk. Wishful thinking didn't stop the Romans. It won't prevent Social Security's problems, either.

David John is a senior research fellow for Social Security at the Heritage Foundation.

About the Author

David C. John Senior Research Fellow in Retirement Security and Financial Institutions
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Social Security

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