As Bill Clintonpointed out,the only wayto keep SocialSecuritysolvent is toraise taxes, cutbenefits, orget a higherrate of returnthroughprivate capitalinvestment.
3Fund balances, therefore, does not by itself have any impact on the Government’s abil-ity to pay benefits.
Even if Congress can find a way to redeemthe bonds, the trust fund surplus will be com-pletely exhausted by 2042. At that point, SocialSecurity will have to rely solely on revenuefrom the payroll tax—but that revenue will notbe sufficient to pay all promised benefits.Overall, Social Security faces unfunded liabili-ties of nearly $26 trillion.
Clearly, SocialSecurity is not sustainable in its current form.There are few options for dealing with theproblem. That opinion is held by people whoare not supporters of individual accounts aswell as by those who are. As former presidentBill Clinton pointed out, the only way to keepSocial Security solvent is to (a) raise taxes, (b)cut benefits, or (c) get a higher rate of returnthrough private capital investment.
HenryAaron of the Brookings Institution, a leadingopponent of individual accounts, agrees.“Increased funding to raise pension reserves ispossible only with some combination of addi-tional tax revenues, reduced benefits, orincreased investment returns from investing inhigher yield assets,” he told Congress in 1999.
The tax increases or benefit cuts would have tobe quite large. To maintain benefits in the firstyear after Social Security starts running a deficit,the government must acquire revenues equiva-lent to $197 per worker. By 2042, the additionaltax burden increases to $1,976 per worker, and by2078 it reaches an astounding $4,193 per worker(in constant 2003 dollars).
And it continues torise thereafter. Functionally, that would translateinto either a huge increase in the payroll tax, fromthe current 12.4 percent to as much as 18.9 per-cent by 2077, or an equivalent increase in incomeor other taxes.
A Declining Rate of Return
Social Security taxes are already so high, rel-ative to benefits, that Social Security has quitesimply become a bad deal for younger workers,providing a low, below-market rate of return.As Figure 2 shows, that return has been steadi-ly declining and is expected to be less than 2percent for most of today’s workers.The poor rate of return means that manyyoung workers’retirement benefits will be farlower than if they were able to invest their pay-roll taxes privately.
On the other hand, a sys-tem of individual accounts, based on privatecapital investment, would provide most work-ers with significantly higher returns. Thosehigher returns would translate into higherretirement benefits, leading to a more secureretirement for millions of seniors.
Figure 1Social Security’s Payroll Tax Surplus orDeficit
2003 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds
, table IV.B1.
S u r p l u s o r D e f i c i t a s P e r c e n t a g e o f T a x a b l e P a y r o l l