Social Security, the federal program providing income security for retirees, the disabled, and their survivors, is one of the most effective government programs in U.S. history. Unfortunately, it's also in trouble and no consensus has emerged, either in Washington or among the public at large, on what approach the nation should take to fix it. The good news, however, is that Social Security reform is more "doable", in that there is more potential for bipartisan consensus than on reforms of health care or tax policy.
Social Security benefits are the backbone of the nation's income security system, and are central to what is often called “social insurance”—the transferring and pooling of risks by an entity, generally the government, that is legally required to provide certain benefits. Social Security benefits are paid monthly to more than 50 million people, including about 31.7 million retired workers, 4.6 million widows and widowers, 7.1 million disabled workers, 3.1 million children, and approximately 800,000 adults who have been disabled since childhood.
Social Security was originally designed to provide one leg of a "three-legged stool" for retirement security, backed up by personal savings and employer pension programs. Increasingly, Americans have come to depend on Social Security. People generally are saving and investing less [even counting 401(k) and IRA plans], are less able to rely on their investments being successful, are carrying more debt, and are less likely to have employer-provided pensions than they were several decades ago.
Federal statistics show that without Social Security, more than 40 percent of those 65 and older would fall below the poverty line. That is part of the great success of Social Security: It has dramatically reduced poverty among, and provided a cushion of income security for, older Americans, people with disabilities and their children, and surviving spouses and children of workers who have died.
The Demographic Clock Is Ticking
A big question looming over the program is whether it can be sustained as baby boomers enter their retirement years and put an unprecedented strain on the system. It is also often asked: Is Social Security going bankrupt? Technically, the answer is no, but paying for benefits could become an overwhelming strain on government in the absence of reforms. And, will benefits have to be cut significantly for future generations?
A crucial factor is the ratio of current workers to retirees. Contrary to what people sometimes think, Social Security does not create individual retirement accounts from the social security (FICA) taxes that are withheld from people's paychecks. Rather, it was designed so that the current workforce pays for the benefits of current retirees. This can be seen either as reinforcing intergenerational bonds or as burdening current workers with the retirement-benefit costs of older Americans. This “pay as you go” system works fine when there are significantly more workers than retirees. But what happens when there are fewer workers paying into the system than there are retirees drawing down on the fund? Current projections show that by 2030, there will be only two workers for every one retiree.
The first baby boomers became eligible for Social Security in 2008. By the time the entire baby boom generation retires during the next two decades, America's elderly population will double from its current size to about 80 million, and the ratio of people drawing Social Security benefits to those working and paying into the fund will fall to 2-to-1. The board of trustees that oversees the Social Security system projects that the program's expenditures will exceed income in 2016. The Social Security Trust Fund provides a cushion against these needs, but by about 2040, the trust fund will be exhausted as well and the system will only be able to cover about three-quarters of the benefits promised. With a national debt that is already $12 trillion, plus $7 trillion in implicit fiscal exposures for future Social Security benefits, we cannot afford to simply borrow more money to cover the shortfall.
This guide will help you consider the kinds of hard choices that the nation will need to make to ensure the long-term stability of Social Security and the federal budget. It lays out three sets of alternative approaches. These are merely intended to be discussion starters. You should not think that you need to adopt every idea under one approach or another. You can mix and match ideas from different approaches, and toss other ideas into the mix.
What do you think are the best courses of action to meet the challenges facing the Social Security system and the federal budget, and why?
Note: The global financial crisis, and the failed businesses and banks it leaves in its wake, obviously provide important context to this debate.