The debate on the future of Social Security has been in the news with increasing frequency. The issue touches almost every American’s fears about personal economic security. Those who want to substantially change the system fear there might not be a system left or future workers will be overburdened with taxes. Others are not convinced the outlook is all that troubled, and fear the consequences of major changes for annuitants. Politicians have their own fears of political backlash from a growing population of older Americans who vote in high proportions. There are honest people and honest concerns on both sides, but discussions too often are polarized by others, again on both sides, who selectively present facts, create euphemisms to mask unpalatable ideas, or demonize those who don’t agree. MOAA believes this important issue demands more objective discussion and less demagoguery. 

What is Social Security? It’s one of the most successful government programs in our nation’s history. It’s a unique hybrid—a universal retirement baseline with a social insurance component to increase protection for lower-income workers. It’s one leg of the “three-legged stool” retirement model that includes Social Security benefits, employer pensions, and individual savings or investments. Since its enactment in 1935, Social Security has expanded to include disability and survivor benefits, all inflation-protected. 

A key principle is that the benefits are progressive. While absolute benefits rise with every worker’s earnings, proportional benefits rise faster at the lower levels of every worker’s income, then more slowly as income increases. Social Security benefits are a retirement income base—not a full retirement for every American. They help lower-income retirees avoid poverty while offering added benefits for continuing employment and advancement. 

Social Security has never failed to pay monthly benefits. Last year, the program paid more than $450 billion in benefits to 46 million retirees, survivors, dependents, and disabled workers. Almost one-third went to the latter three categories. Today, Social Security is almost universal, with 96 percent of all U.S. workers enrolled. Last year, 154 million Americans paid Social Security taxes.

Are your Social Security contributions yours? Yes and no. Social Security is financed by payroll taxes paid by both the employee and the employer. But it’s important to understand that benefit checks for today’s Social Security annuitants are paid for with the Social Security taxes collected from today’s workers. Benefits are based on your income history, so Social Security can give you a personalized statement of your individual current or projected benefits. But your Social Security tax payments actually go to pay benefits for someone else. Did you earn and contribute to your Social Security benefit? Absolutely. But the money to pay your benefit ultimately comes from others.

Social Security takes in more taxes today than it pays in benefits, but the government uses those excess tax receipts to pay other government bills. There’s a Social Security trust fund that totals trillions of dollars. But that trust fund really is a huge federal IOU. The government must continue collecting more taxes to meet the future payment obligations it represents.

How accurate are Social Security solvency forecasts? They’re dictated mostly by projections of expected numbers of workers versus numbers of annuitants. 

This ratio has changed significantly over time. In 1950, there were 16 workers for every beneficiary. Today that ratio is about 3-to-1—and is projected to drop to 2-to-1 by 2030 (see “Workers per Beneficiary,” below). 

By 2008, the first of 76 million baby boomers will reach retirement age, and most boomers will have retired by 2030. This will create significant pressure on the trust funds, and current surpluses are projected to disappear. Further, life expectancy continues to grow, so more retirees will draw benefits longer. Meanwhile, falling birthrates mean fewer future workers will be paying taxes into the system. These forecasts are made by government actuaries, using the latest economic and demographic data. They’re based on assumptions and estimates that are updated every year. But there’s no escaping the coming “bow wave” of aging baby boomers.

The most recent projection is that we will start eating into the current trust fund surplus (that is, benefit payments will exceed worker payroll taxes) by 2018, and the trust fund will be exhausted by 2042. At that point, projected Social Security taxes would cover at most 73 percent of projected benefits. In that event, either benefits would have to be reduced sharply or taxes would have to be increased substantially for those still working—or some combination of both. 

Some experts and politicians say this is not necessarily an accurate projection—that national economic conditions could improve, increased birth rates or immigration could produce more tax-paying workers, longer-living people will want to work longer before retiring, etcetera. There is a reasonable debate about the advisability of depending upon any particular economic scenario (rosy, doomsday, or anything in between) in developing a prudent course of action. 

As baby boomers enter retirement, the ratio of w orkers paying into Social Security versus 
beneficiaries drawing from it will steadily decrease. 

The stock market lure. There is no shortage of ideas about how to fix or save Social Security. Some call for “privatizing” the system by allowing some portion of Social Security taxes or trust fund amounts to be invested in private equities. Some see this being done by government fund managers, others by allowing individual workers to put part of their own taxes into individual investment accounts. The theory is that stock market returns will be high enough to substantially increase the amount of money available to pay benefits in the out-years—thus reducing the need to raise payroll taxes on workers. 

Opponents say investing today’s payroll taxes in stocks would reduce funds available to pay benefits to current beneficiaries. This means using more general revenues from the Treasury—higher taxes or a bigger deficit—to avoid harm to current annuitants. 

Privatization critics also emphasize downside risks of the stock market. People who retired in the past few years saw their 401(k) values decline precipitously. Critics see this as playing havoc with the principle of providing a guaranteed baseline protection for lower-income workers. 

Some argue that Social Security is sound and only needs relatively small adjustments over time to keep it healthy. But that’s not a risk-free approach, either. If a Social Security “train wreck” is looming on the horizon, putting off needed action only will worsen the adverse consequences in the future (see “If we wait ...,” below). The truth may lie somewhere in the middle, but the public must understand the problem, the options for action, and the likely consequences of each option to reach the right answer. 

Politics of partisanship. President George W. Bush highlighted Social Security reform as a campaign issue in 2000 and subsequently established a Presidential Social Security Commission. The commission’s report in December 2001 recommended pursuing Social Security privatization options. But opponents said the commission was “packed” with privatization advocates, and the recommendations so far have gone nowhere.

At this point, the public tends to see the debate in partisan terms, with Republicans advocating Social Security reform and Democrats resisting it. Certainly each of the major parties has strong incentives to portray itself as the champion of saving or protecting Social Security. But this is a great over-
simplification. There are reasonable people on both sides, and some demagoguery on both sides. We must get past the rhetoric. This can’t be just about trying to win the next election. It’s about what’s right for the country and for current and future annuitants and taxpayers. 

Avoiding a generational clash. The Social Security debate too often is portrayed as intergenerational warfare—supposedly pitting well-off retirees who insist on preserving their current benefits against angry young people who believe they’re being overtaxed by a Social Security system that won’t be there for them when they retire.

MOAA believes strongly that this is an inappropriate portrayal. Most Americans have multigenerational families and circles of friends. MOAA members have parents, children, and grandchildren whom they love and for whom they wish a secure future without an unfair share of sacrifice.

In 2002, MOAA members overwhelmingly approved a resolution stating that any action addressing Social Security problems “must fairly balance legitimate interests of current and future beneficiaries and current and future taxpayers, and ... ensure no group is forced to bear disproportionate sacrifice in any required restructuring.” 

Many MOAA members are of the baby boom generation whose coming retirement is the main cause for concern about the program. These members aren’t anxious for a solution that slashes benefits for their parents or imposes grievous taxes on their heirs. 

What MOAA wants. MOAA seeks a rational and realistic assessment of the problem and alternative options to address it. We believe good ideas can stand up to scrutiny and that reasonable people are willing to make reasonable choices—even distasteful choices—if they are convinced the alternatives are even more distasteful. As the Social Security debate heats up, we plan to offer a series of articles exploring arguments on both sides. Our objective is to provide the most unbiased information so we can prepare MOAA members for participation in a national debate that will only intensify in the next few years.