Putting the Social Security Problem in Perspective

There are many ways to look at the upcoming Social Security problem - but most of these perspectives are misleading. For example, we hear that the Social Security trust fund will run out of money in 2042 or that the system currently has a $4.7 trillion unfunded liability. While both of these statements are supported by the 2007 Annual Report of the Social Security Trustees (at http://www.ssa.gov/OACT/TR/TR07/tr07.pdf), they aren't particularly meaningful.

I say this because I believe the following:
(1) The social security trust fund doesn't really matter since it consists of US Treasury Bonds. It's just an "IOU" from one part of the government to another.
(2) Benefits can and will be paid out of general funds when the trust fund runs out of money. This is due to the political power of seniors, who vote in higher numbers than other groups and who place a high priority on protecting their benefits.

To the extent that Social Security benefits are paid from general funds, they will simply become part of the annual budget prioritization process. The right question to ask now is whether the government will be able to cover Social Security tax shortfalls after the Baby Boomers retire without doing substantial damage to our economy or our currency.

Focusing on a table deep in one of the appendices to the Trustee's Report, we find that in 2040, Social Security benefits will exceed Social Security taxes by $899 billion using intermediate cost projections (see page 172 of the report). Adjusting for inflation, the shortfall is $363 billion in today's dollars. Based on economic growth forecasts in the report, the differential is 1.48% of GDP.

This is a lot of money: about three times the amount we currently spend on the Iraq War each year. But, thus far, the Iraq War appears to have had a very limited economic impact, so perhaps an annual budget shock three times greater than this can be managed. On the other hand, one reason the Iraq War has not seriously damaged the economy is the current willingness of foreigners to finance U.S. deficit spending. Later in the century, when China may be experiencing a slowdown in export growth and the U.S. economy will likely have much less relative importance, our Treasury securities may be much less attractive to foreign investors.

To ensure the availability of benefits without risking future damage to the economy, today's policies should focus on reducing the gap between Social Security taxes and benefits after Baby Boomers retire.

In the next post, I'll suggest some ways of achieving this objective.

Why Social Security 2050?

This blog is devoted to the following questions:

* Can the younger and middle aged workers of today expect Social Security to provide a meaningful portion of their retirement income?

* What policy changes would be needed to assure these workers of a reasonable income when they retire?

Many participants in the Social Security discussion bring to the table an ideological bias to which they attempt to fix the facts. While this author also has such a bias, I will strive to set it aside in hopes of finding the best answers to the questions above.