May 25, 2011
By David C. John
This month’s report from the Social Security trustees notes that “[p]rojected long-run program costs for both Medicare and Social Security are not sustainable” and legislative action is necessary to avoid “disruptive consequences.”
How bad is it? Social Security is now in permanent deficit mode. Last year, the benefits paid outstripped payroll tax receipts by $49 billion. This year’s deficit is estimated at $46 billion.
And, the trustees say, things will only get worse. Adjusted for inflation, annual deficits are projected to hit $81.5 billion in 2020. Over the following decade, they will more than triple, to $288.4 billion. By 2036 — the year when the last of the special-issue bonds in the Social Security Trust Fund will be cashed out — the program will run an annual deficit of about $350 billion.
Once the bonds are gone, the trustees will have to reduce benefits by about 25 percent. But the vast gap between program income and expenditures will have wreaked havoc with the federal budget long before then.
There is no Social Security trust fund in the sense of cash or negotiable stocks and bonds. The government spends every penny of payroll tax as soon as it comes in — either on benefits or (when there’s money left over) on things like paying interest on the national debt.
But the payroll tax couldn’t cover the benefits owed last year. And, the trustees say, it never will again. Today’s unfunded benefits will be paid from other taxes or by additional borrowing.
As Social Security increasingly drains the general treasury, it becomes harder to find money for other programs. It also swells the national debt. If left unreformed, the program providing benefits to retirees will inevitably force large and growing tax hikes on working Americans struggling to support their own families.
Many opponents of reform claim that raising payroll taxes by “only” about 2 percent will solve Social Security’s problems. It’s an attractive talking point, but their math is wrong. As the trustees report makes clear, the program’s future deficits aren’t just as large as today’s, they are perpetually growing by leaps and bounds. “Modest” tax hikes and minor tweaks to the system will fall far short of resolving the problem.
Put plainly, the trustees report is bad news — especially for younger workers. Though benefits of their parents and grandparents are fairly safe, their own are not. Anyone born after 1970 won’t reach full retirement age until after the trust fund is exhausted.
Unless Congress acts soon, younger workers can expect to pay full Social Security taxes throughout their careers and receive 75 percent or less of the benefits currently promised to them. Moreover, they will have to repay by 2036 the nearly $6 trillion owed the Social Security trust fund.
This puts younger workers in a major dilemma. On the one hand, they will have to save far more for their retirements, because their Social Security benefits will be sharply reduced. Yet, throughout their working careers, they will be paying higher and higher taxes to keep the system afloat, severely restricting their ability to save.
This can’t go on. Rather than defend the patently indefensible status quo, both Congress and the Obama administration should tell us how they propose to fix the problem.
Social Security’s problems are based on demographics. That’s not something that changes from year to year, nor is it something that Congress can change.
But Congress can change Social Security. It can and must reform Social Security into a financially viable, fiscally responsible program that assures seniors they need not fear ending their lives in poverty. If our leaders fail to fix this program soon, they will be consigning not only today’s young workers, but their children and grandchildren, to a dimmer future — one of higher taxes, reduced savings and a retirement of tremendous economic uncertainty.
David C. John is senior research fellow in retirement security and financial institutions in the Heritage Foundation’s Thomas A. Roe Institute for Economic Policy Studies.
First appeared in The Washington Times
David C. John
Senior Research Fellow in Retirement Security and Financial Institutions
Read More >>
Heritage's daily Morning Bell e-mail keeps you updated on the ongoing policy battles in Washington and around the country.
The subscription is free and delivers you the latest conservative policy perspectives on the news each weekday--straight from Heritage experts.
The Morning Bell is your daily wake-up call offering a fresh, conservative analysis of the news.
More than 450,000 Americans rely on Heritage's Morning Bell to stay up to date on the policy battles that affect them.
Rush Limbaugh says "The Heritage Foundation's Morning Bell is just terrific!"
Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."
Sign up to start your free subscription today!
The Heritage Foundation is the nation’s most broadly supported public policy research institute,
with hundreds of thousands of individual, foundation and corporate donors. Heritage, founded in
February 1973, has a staff of 275 and an annual expense budget of $82.4 million.
Our mission is to formulate and promote conservative public policies based on the principles of free
enterprise, limited government, individual freedom, traditional American values, and a strong national
defense. Read More
© 2014, The Heritage Foundation Conservative policy research since 1973