The Looming Social Security Crisis

1
The Looming Social Security Crisis
2

• 1. Introduction to the Social Security Program in
  the U.S.

3
Program Summary

• Offers protection against the loss of income that
  usually accompanies old age or the death of a
  breadwinner
• It is a pay-you-go system. It is not based on
  saving-and-investment model
• Primarily an intergenerational income-transfer
  program
• Most taxes collected from the present generation
  of workers are used to finance current benefits.

4
Program Summary

• Because of the pay-as-you-go nature of the
  program, it is influenced by changing
  demographics.

5

• 2. Why Is Social Security Headed for Problems?

6
Source of Problem

• Baby boomers moving into the retirement phase of
  their life will place strong pressure on the
  Medicare program as well as the social security
  retirement system.
• The current surplus of revenues from the payroll
  tax relative to retirement benefits will
  dissipate around 2014.

7
Source of Problem

8
Source of Problem

9
Source of Problem

10
Source of Problem

11

• 3. Will the Trust Fund Lighten the Future Tax
  Burden?

12
Will the Trust Fund Help?

• Current revenues exceed expenditures on benefits
  by about 100 billion per year.
• This surplus is put in a trust fund invested in
  government bonds.
• Because the federal government both pays and
  receives the interest on these bonds, they are
  not like the bonds, stocks, and physical assets
  held by a private insurance company.

13
Will the Trust Fund Help?

• The SSTF bonds are an IOU from the Treasury to
  the Social Security Administration, so their net
  asset value to the federal government is zero.

14

• 4. The Real Social Security Problem.

15
The Real Problem

• A crisis faced by the pay-as-you-go system will
  arise around 2014 when the revenues from the
  payroll tax will begin to fall short of the
  benefits promised to retirees.

16
Possible Solutions

• Four possible ways of dealing with the future
  shortfall of revenues relative to promised
  benefits
• reduce benefits.
• raise taxes and/or cut other government
  expenditures in order to inject additional funds
  into the system.
• borrow from the general public.
• reform the system in a manner that will increase
  the rate of return earned by (or for) workers and
  future retirees.

17
Trust Fund

• The presence of SSTF bonds does not change these
  alternatives or make it easier to deal with
  future social security deficits.
• The problem is not depletion of the trust funds,
  but the burden of soaring social security
  deficits on the economy beginning in about 15
  years.

18

• 5. Reform Alternatives

19
Government Investment in the Stock Market

• States have invested employee retirement funds in
  the stock and bond markets for many years, but
  are small compared to the SSTF.
• Political pressures could cause several problems
  from such a large government investment.
• The record of government directed funds in other
  countries has been poor.

20
Use Payroll Taxes to Fund Personal Retirement
Accounts

• For a time, workers would continue to fund the
  redistributional part of social security with
  part of their tax.
• Individuals might be allowed to fund their own
  retirement by channeling a portion of their
  payroll tax to a personal retirement saving
  account.

21
Use Payroll Taxes to Fund Personal Retirement
Accounts

• As retirement accounts grow, individuals could
  allocate more of the payroll tax into them in
  exchange for the receipt of lower social security
  benefits.
• Rather than the government managing these funds,
  individuals would be permitted to choose among
  various stock and bond mutual funds.

22
Use Payroll Taxes to Fund Personal Retirement
Accounts

• Private accounts would encourage more savings,
  investment, and ownership of capital by future
  retirees.

23

• 6. Making Private Social Security an Option The
  Experience of Chile

24
Use Payroll Taxes to Fund Personal Retirement
Accounts

• Chile's pioneering plan, first adopted in 1980,
  provides a pattern for others.
• The basics of the Chilean plan are
• a defined contribution system
• privately owned and managed investment accounts
• The Chilean plan forces employees to save, but
  gives them a right to the funds in their
  retirement account.
• The Chilean plan has worked well for both the
  participants and the economy.

25

• 7. Social Security and Fairness Issues

26
Fairness Issues

• Generations born after World War II would be
  better off without social security.
• Social security discriminates against
  middle-income recipients.
• Social security discriminates against married
  women in the work force.
• Political dependency results from the system.

27
End of Lecture