Policy Debate: Will Social Security survive into the 21st century?
Issues and Background
[S]ecurity was attained in the earlier days through the interdependence of members of families upon each other and of the families within a small community upon each other. The complexities of great communities and of organized industry make less real these simple means of security. Therefore, we are compelled to employ the active interest of the Nation as a whole through government in order to encourage a greater security for each individual who composes it.The Social Security Act of 1935 created a social insurance program under which retired workers age 65 or older became eligible for social security payments from the federal government. Taxes were first collected in 1937 and monthly social security benefit payments began in 1940 (a single lump-sum payment was provided to workers who retired during the period from 1937 to 1939). By the time monthly payments had begun in 1940, benefits had also been extended to the spouse and minor children of insured workers.
The benefits provided under the original legislation were relatively small and were not indexed to inflation. Legislation introduced in 1950 and 1952 nearly doubled the size of the social security benefit payments received by retired individuals. Increases in the level of benefits, however, were provided only by special acts of Congress until annual cost-of-living increases were introduced in 1975.
In addition to providing retirement income, the current social security program provides disability insurance to workers of all ages, health insurance to virtually all individuals aged 65 or above (through the Medicare program), and aid to needy disabled individuals.
While social security trust funds have existed from the inception of the program, the system has operated primarily on a "pay-as-you-go" system under which current workers pay taxes that are used to fund current benefit payments. Much of the concern about the future viability of social security is the result of this payment system. The size of the retired population will expand dramatically as baby-boom generation workers begin to retire in large numbers in about 20 years. As a result of increases in life expectancy, these workers will, on average, receive benefits over a longer period of time than earlier cohorts. This large increase in the number of retired workers, combined with low U.S. birthrates during the past several decades have resulted in a situation in which the ratio of workers to retired individuals will decline substantially. Recent increases in social security tax rates and an increase in the retirement age from 65 to 67 (a gradual increase taking place over a 22-year period beginning in the year 2000) have postponed this problem, but not eliminated it. Today there are over three workers for each social security recipient. By the year 2030, there will be only two workers for each recipient.
Another more general concern is that the social security system may discourage saving and investment. Martin Feldstein has argued that the current social security system discourages savings. He argues that workers have less incentive to save because they anticipate receiving social security benefits upon their retirement. Furthermore, social security taxes lower the disposable income of workers and reduce the ability of workers to save. Since capital investment, in the long run, is tied to the level of savings, a lower savings rate is expected to lead to less investment and a slower rate of economic growth. Other economists, disputing this result, have noted that the existence of the social security system has increased the incentive for individuals to retire at age 65. If individuals retire earlier in response to these incentives, they will work longer hours and may save more during their working years.
Many economists have suggested that, as a result of a substitution bias, the rate of change in the CPI overstates the true cost of inflation. Since social security benefits are indexed to the CPI, this would cause social security payments to increase by more than necessary to maintain the standard of living of social security recipients. There is some dispute, though, about the magnitude of this bias.
One proposal for reforming social security involves the development of an individual accounts plan in which the social security tax rate would be increased to fund an individual investment account that is managed by the government. Alternative proposals involve a privatization approach in which some portion of the social security tax is diverted into mandatory individually managed retirement accounts.
In reading through the online resources listed below you will find a wide range of opinions concerning the magnitude of the problems facing the social security system. Part of the reason for this is that forecasts of future social security revenue depend on factors such as future rates of economic growth, the level of future unemployment and labor force participation rates, and similar factors. Small differences in rates of economic growth can have dramatic effects on the level of output (and tax revenue) over the course of a 20-30 year period. Different assumptions about such future outcomes result in very different conclusions about the future solvency of the social security system.
Primary Resources and Data
This page contains a discussion of the evolution of the social security system from its founding through the present day. This document provides a concise discussion of the historical context in which the social security system evolved.
The Social Security Administration's web site contains a wealth of information concerning the operation of the social security system. This site contains information on social security tax rates and benefits provisions. Data and statistics may also be acquired from this site.
This document contains the most requested facts and statistics related to the Social Security system. A good deal of information is provided about current and historical tax and benefit levels.
This site contains a solid discussion of the problems facing the Social Security system and an examination of the major reform proposals.
In this testimony, Social Security Commissioner Kenneth S. Apfel discusses the implications of demographic changes on the social security trust funds. He notes that projections indicate that, under current tax and benefit provisions, the trust funds will begin to decline in 2019 and be depleted by 2029. After this, annual revenues will cover the cost of approximately 75% of the benefits. Apfel also notes that the effect of an increase in the retirement age is somewhat difficult to predict precisely because it will partly depend upon employer behavior and the health status of workers in this age group.
In this testimony, Commissioner Apfel reiterates the problems facing social security and describes the need for reforms.
This site contains links to studies conducted by this organization, transcripts of Congressional testimony, and an extensive collection of links to Social Security sites on the Internet. The Employee Benefit Research Institute has created a simulation model that has been used to predict the impact of alternative reform proposals. Summaries of results from such simulations are reported in articles contained on this site.
At this site, you can get an estimate of your expected lifespan after you answer a few questions about your age, weight, lifestyle, and health status. While this is not exactly a Social Security reform resource, it does serve to illustrate how long you are expected to be receiving Social Security benefits.
The Concord Coalition is a nonpartisan organization that advocates a balanced budget and reforms designed to preserve the Social Security and Medicare systems. This site contains transcripts of debates on Social Security reform, charts and graphs about Social Security and Medicare, and a collection of position papers and analyses on Social Security reform. The Concord Coalition argues that Social Security benefits should be reduced, the retirement age should be raised, and privatization should be introduced in the form of mandated savings accounts.
In this article, Charles I. Plosser provides a good discussion of the problems facing Social Security and Medicare and a description of the major reform proposals. He argues in favor of the complete privatization of the Social Security system.
This document (appearing in the September/October 1996 issue of the Cato Institute Policy Report) provides statements by several liberals and Democrats in support of Social Security reform proposals that introduce some form of privatization (such as mandatory savings accounts) into the Social Security system while preserving the "safety net" function of the system.
In this August 7, 1997 Heritage Foundation article, Daniel J. Mitchell argues that the Social Security system should be replaced by a privatized system since the current system cannot fulfill its promises to current workers. Evidence of the successful introduction of privatized retirement systems in other countries is also used to support this argument.
In this September 7, 1998 Cato Institute Briefing Paper, Michael Tanner argues that union workers would gain from the privatization of Social Security. He argues that workers would receive a higher rate of return from a privatized Social Security system than is received under the current system. Tanner also notes that the existing system could only be maintained if Social Security taxes rise or benefits fall. Neither of these alternatives is very desirable for workers. Tanner also argues that a privatized Social Security system would reduce the barrier between capitalists and workers by allowing all workers to own capital. He argues that this would also result in a less inequitable distribution of wealth. (To view this document, the Adobe acrobat viewer plugin is required. You may download this viewer by clicking here.)
Darcy Ann Olsen, an entitlements policy analyst at the Cato Institute examines how women would be affected by Social Security privatization. Since women, on average, have lower incomes, spend fewer years in the labor market, and have a longer life expectancy, the current social security system provides lower monthly benefits to women than men. Under the current system, a married woman may either receive benefits based upon her own work history or may receive benefits equal to 50% of her husband's benefits. In many cases, the benefits based upon husband's earnings are larger. In such a situation, a married woman who works for her entire life receives a level of benefits that is equal to the benefits received by a married woman who never worked. Olsen reports the results of several simulation analyses that indicate that married women would receive a higher standard of living under a fully privatized system.
This page contains links to a collection of studies that support the privatization of Social Security. Several proposals for introducing a privatized social security system are available on links from this page.
Part I - http://www.cato.org/realaudio/cbf-09-15-98.ram
Part II - http://www.cato.org/realaudio/cbf-09-15-982.ram
This video forum provides a discussion of the arguments presented in A New Deal for Social Security, a book published by the Cato Institute. Authors Michael Tanner and Peter J. Ferrara and several guests provide a discussion of the problems facing the current Social Security system. They argue that a privatized system would eliminate these problems. (To view this video, the RealPlayer plugin is required. You may download this plugin by clicking here.)
In this January 31, 1997 paper, Martin Feldstein argues that privatization of the Social Security system is desirable because it would encourage saving, investment, and economic growth. He also argues that it would provide a higher rate of return to participants than is received under the current system.
C. Eugene Steuerle argues that the estimates of an increase in saving resulting from a conversion to a privatized social security system are inflated. When individuals are required to save more through a mandated retirement savings account, they will reduce other forms of savings.
In this April 10, 1997 statement (prepared for the Subcommittee on Social Security of the House Committee on Ways and Means), C. Eugene Steuerle argues that the current Social Security system:
In this July 21, 1996 Washington Post article, Henry J. Aaron, a senior fellow at the Brookings Institution, provides a series of arguments against privatization. He notes that a problem that may begin to appear in over 30 years is not something that demands the immediate replacement of a system that has operated successfully for more than a half century. Aaron argues that the higher rate of return resulting from private savings accounts could be achieved by allowing the trust fund managers to invest in stock market index funds. To achieve privatization, tax increases would be required since most current taxes are used to pay current beneficiaries, leaving a small proportion of fund available for private investment. Aaron notes that the current Social Security system has been effective in improving the wellbeing of the poor and disabled; an outcome that may not be achieved by a privatized system.
In this April 29, 1996 Economic Policy Institute Issue Brief, Dean Baker argues that there is no need to change the current Social Security system. He notes that the current system provides a fair redistribution of income, increases economic security, and operates in an efficient manner (with administrative costs -- as a share of benefits -- that are less than 1/40th of the administrative costs of private insurance companies). Baker notes that the "crisis," if it exists at all is more than 30 years in the future. The projections of this crisis, though, are based on an assumed rate of economic growth that is lower than that experienced during any period in U.S. history. Baker notes that with the retirement of the baby-boom generation, labor shortages are likely to increase real wages, making a crisis less likely or less severe. Real wage growth will also make it easier to pay for this system in the future should a tax increase be necessary. Several reform proposals are also discussed in this article.
This page contains a summary of recent research conducted by RAND economists Constantijn W. A. Panis and Lee A. Lilliard on the distributional impacts of three proposals for dealing with the depletion of the social security trust funds. The proposals that they examine are: reducing the cost-of-living adjustment by 1 or more percentage points, reducing benefits for high-income recipients, and gradually raising the retirement age to 70.
Jon Shure, vice-President of the Twentieth Century Fund, argues that the "crisis" in Social Security does not require a drastic change in what has been a very successful system. The projected crisis need not materialize, however, if minor modifications are made in the current system. Shure also notes that the projected crisis will not materialize if the rate of economic growth does not decline (as assumed when the forecasts were generated). He suggests that the recent push for privatization is primarily the result of aggressive lobbying by investment firms that would benefit from the commissions that would occur under a privatized system.
In this online article, the Economic Policy Institute argues that the Social Security system is basically sound and there is no need for major reform. The article suggests that the major threats to the Social Security system are the proposals to reform it. The Economic Policy Institute argues that a privatized system would benefit high-income workers and investment firms but would harm low-income and middle-income workers. Risk and administrative costs would be substantially higher under a privatized system of retirement insurance.
In this 1996 article, Jerry L. Mashaw and Theodore R. Marmor argue that minor modifications are needed to ensure the future solvency of the Social Security system. They suggest that the pressure for privatization is the result of differences in goals, not an urgent need to reform the current system. Mashaw and Marmor argue that proposed privatization plans will make the distribution of income more inequitable.
The Social Security Network web site contains links to a large collection of studies dealing with alternative social security reform proposals. Most of these studies suggest that full privatization is not desirable, but some investment of the social security trust funds in the stock market may be desirable (see, in particular, Alicia Munnell's testimony before Congress on the "opinions" page).
In this statement, the executive council of the AFL-CIO states its support for retaining the basic Social Security system.
In this Heritage Foundation Lecture, Estelle James examines how other nations have reformed their social security systems. She notes that reforms have generally involved a shift to defined contribution programs that are fully funded. World Bank data suggest that privately managed retirement accounts provide a higher rate of return than those that are managed by the government.
In this testimony, José Piñera, the President of the International Center for Pension Reform in Santiago, Chile, describes the success experienced by the privatized Social Security system introduced in the Chilean economy in 1981. He argues that this system is a primary cause of the substantial increase in the saving rate in Chile in the years following the introduction of this system.
Vikncente Navarro argues that the Chilean social security reforms has very high administrative costs and primarily benefits high-income individuals and the insurance conglomerates that manage the funds.