Protecting the Many Tomorrow

Social Security is likely to provide a basic minimum income for most Americans who retire in the future. Contrary to some popular impressions, the main danger in the years to come is not that the system will go broke. It is that Federal government will consume the financial surplus that should be accumulating toward the day some twenty-five years from now when the unusually large baby-boom generation begins to retire.

The Social Security amendments of 1983 averted a crisis in the program and were also designed to set Social Security on a sustainable long-term path. The reforms reflected a roughly even split between tax and benefit changes. Scheduled payroll tax increases were accelerated, a portion of benefits above certain income levels was taxed for the first time, and the normal retirement age was raised starting in the early part of the next century and reaching age sixty-seven in the year 2022.

With these changes—and with moderate assumptions about economic growth, mortality, and fertility—the Social Security system should be healthy for the next fifty years. Of course, it is possible that weaker economic growth and smaller increases in productivity and real wages could produce trouble in the next century. Even should these possibilities occur, however, the solvency of the Social Security system could be maintained without Draconian measures. It is difficult to imagine a future in which a payroll tax increase of about 1 to 1½ percentage points would fail to remedy any revenue shortfall. Such a tax increase would probably have some adverse effects on employment, but its impact would certainly be no greater than that of the payroll tax increases we have weathered in the last several decades.

The real problem to be faced in Social Security financing is not actuarial but political. The 1983 reforms were deliberately and prudently designed to accumulate a surplus that could be drawn on gradually to relieve the cost burden that will occur when the unusually large cohort of baby boomers begins retiring in the next century. The balance in the Old Age, Survivors' and Disability Insurance (oasdi) trust fund, which is the source of benefit payments to eligible retirees, must grow now to avert a deficit later (see Figure 5.1). The balance in the oasdi trust fund, which was $109 billion in 1988, will likely triple to $352 billion in 1997, and could grow to trillions of dollars during the next two or three decades. These surpluses represent necessary accumulations for the long-range solvency of the system.

The more immediate danger is that the growing balance in the Social Security trust fund will be diverted in ways that remove these funds from the pool of savings and put them into current consumption. Every politician can develop a laundry list of new spending initiatives, or bailouts for old programs, that could be funded from the surplus.