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Reforming Social Security
By Stephen J. Morgan
With so many options to choose from, proponents of changing
the Social Security system agree on only one thing: delaying the
process will be disastrous
Politicians have long thought of Social Security as one
of the sacred cows of American society. Lay a hand on it and
you face the wrath of voters in the next election.
But after repeated warnings that Social Security is headed
for insolvency in the 21st century, Congress is expected
to give serious consideration in 1999 to reforming the mammoth
and frequently misunderstood system. Whether
lawmakers will succeed is anybody’s guess, but the stars
appear to be aligned for some form of substantive change.
“I think there’s a window of opportunity that [President]
Clinton sees as part of his legacy,” says Dick Tewksbury,
WG’77, managing consultant in the Philadelphia office of
Watson Wyatt Worldwide. “And it’s a narrow window
because very soon everyone’s eyes will turn to the 2000 elections
and any major decisions will get tabled again. So,
whatever that window is, there might be aggressive movement
to do something. It’s a profound issue that people
have been dodging for many years.”
The reform efforts will largely focus on proposals to
allow payroll taxes to be invested in the stock market, either
by workers themselves or by the Social Security trust fund,
as opposed to the current system in which the taxes are
invested by the federal government in U.S. Treasury bonds.
The sense of urgency to do something about the system
arises not from any immediate threat of insolvency,
but from events that will unfold over the next few decades.
“We’re not running out of money this week or month or
even this year,” says Olivia S. Mitchell, International Foundation
of Employee Benefit Plans Professor of Insurance
and Risk Management and executive director of Wharton’s
Pension Research Council. “In that sense, it’s not something
we have to fix to prevent retirees from going into
penury immediately.” What Mitchell does predict, however,
is that “the system will not be solvent around the year
2025, give or take a few years.”
A report issued in April 1998 by the Social Security Advisory
Board, a bipartisan panel that advises the President,
Congress and the Social Security commissioner, forecasts a
grim future for the system if it is left untouched.
The first gloomy milestone is expected to occur in 2013,
when spending by the Social Security Old Age, Survivors, and
Disability Trust Fund will exceed the revenue raised through
the Social Security tax. At this point, an amount equal to all
of the payroll tax income and part of the interest due to the
trust fund from outstanding Treasury bonds will be needed
to pay benefits.
By 2021, Social Security spending will be greater than all
of the system’s income, not only from payroll taxes but from
interest on the bonds. “At this point, the government will
have to begin paying back the funds it has borrowed from
Social Security,” the report says. “This will provide the government
with a public finance issue that will need to be
addressed because, in order to pay the funds that are due, the
Treasury will have to redeem the bonds held by the trust
fund.” Only by cashing in the bonds will Social Security be
able to pay the full amount of promised benefits until 2032.
Around 2032, though, all of the trust fund assets will
have been used up and the ongoing income to the program
will not be enough to pay all the benefits owed to people.
To be specific, income from the trust fund in 2032 will be
enough to pay only 72 percent of benefits. That figure will
fall to 67 percent by 2070.
The second and third decades of the next century are critical
because that is when the retirement of baby boomers will
be in full swing, putting additional strain on an already
stressed-out system. It's no wonder, says Mitchell, that people
today are “sitting up and taking notice.”
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