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.
~ Franklin
D. Roosevelt, June 8, 1934
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 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 resulting from improved medical care, these workers will, on
average, receive benefits over a longer period of time than earlier retirees.
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. Economists,
who dispute these findings, have noted that the existence of the social security system has increased the incentive
for individuals to retire at age 65. Individuals who retire at an earlier age in response to these incentives
will be expected to 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 an amount that is greater than that needed 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.
The online resources listed below provide 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.
In May 2001, President George W. Bush announced the formation of a commission that would
examine the Social Security system and recommend changes that would address the projected
shortfalls. This commission has been criticized for consisting entirely of
advocates of Social Security privatization. The final report of this commission was released
in December 2001. It recommended the consideration of three reform proposals that
provide for the introduction of varying degrees of privatization.
Primary Resources and Data
- Social Security Administration, "Social Security History"
http://www.ssa.gov/history/history.html
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.
- Social Security Online
http://www.ssa.gov
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.
You may acquire data and statistics from this site.
- Congressional Research Service, "Social Security: Brief Facts and Statistics"
http://kuhl.house.gov/UploadedFiles/ssabrief.pdf
This document, updated on March 3, 2005, 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. The Adobe Acrobat viewer plugin is required to view this document.
You may download this viewer by clicking here.)
- The Century Foundation, "Retirement Security"
http://www.tcf.org/2L/Main.asp?TopicId=2
This site contains a solid discussion of the problems facing the Social Security system and
an examination of the major reform proposals.
- Kenneth S. Apfel, "Testimony Before House Ways and Means Subcommittee" - February 26, 1998
http://clinton3.nara.gov/WH/New/socsec/frames/ssa3.html
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.
- Kenneth S. Apfel, "Testimony before the Senate Committee on Finance" - July 22, 1998
http://clinton3.nara.gov/WH/New/socsec/frames/ssa1.html
In this testimony, Commissioner Apfel reiterates the problems facing social
security and describes the need for reforms.
- Employee Benefit Research Institute Social Security Research Program
http://www.ebri.org/research/SSProject/
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.
- Longevity Game
http://www.northwesternmutual.com/games/longevity/
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.
Different Perspectives in the Debate
- The Concord Coalition, "Social Security"
http://www.concordcoalition.org/issues/socsec/index.html,
and
- The Concord Coalition, "Medicare and Medicaid"
http://www.concordcoalition.org/issues/medicare/index.html
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.
- Cato Institute Policy Report, "Social Security Reform: The Progressive Case"
http://www.cato.org/pubs/policy_report/cpr-18n5-5.html
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.
- Daniel J. Mitchell, "Social Security: Ready to Retire?"
http://www.heritage.org/Press/Commentary/ed081299b.cfm
In this August 12, 1999 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.
- Michael Tanner, "Union Workers Should Support Social Security Privatization"
http://www.cato.org/pubs/briefs/bp-039.pdf
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.
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- Michael Tanner, "'Saving' Social Security Is Not Enough"
http://www.cato.org/pubs/ssps/ssp20.pdf
Michael Tanner elaborates on his arguments for privatization in this
May 25, 2000 Cato Institute article. He suggests that privatization
would benefit low-income workers by providing a higher real return than
is received under the existing social security system. (The Adobe Acrobat
viewer plugin is required to view this document. You may download this
viewer by clicking here.)
- Michael Tanner, "No Second Best: The Unappetizing Alternatives to Social Security Privatization"
http://www.socialsecurity.org/pubs/ssps/ssp24.pdf
Michael Tanner discusses alternative social security reform proposals
in this January 29, 2002 Cato Institute study. He argues that their
are no good alternatives to the privatization of Social Security. (The
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download this viewer by clicking here.)
- Darcy Ann Olsen, "Greater Financial Security for Women with Personal Retirement Accounts"
http://www.cato.org/pubs/briefs/bp-038.html
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.
- The Cato Institute, "Social Security Choice"
http://www.cato.org/pubs/ssps/sspstudies.html
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.
- Cato Book Forum, A New Deal for Social Security (video)
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.)
- Martin Feldstein, "Privatizing Social Security: The $10 Trillion Opportunity"
http://www.cato.org/pubs/ssps/ssp7.html
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, "Mandated Saving and the Fallacy of Aggregation"
http://www.urban.org/url.cfm?ID=1000086
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.
- C. Eugene Steuerle, "A Framework for Evaluating Social Security Reform Options"
http://www.urban.org/url.cfm?ID=900282
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:
- reduces the productive capacity of the nation by encouraging individuals to retire,
- favors consumption at the expense of saving,
- does not adequately provide for the elderly poor and does not adequately compensate second earners
in a household, and
- reduces societal saving by:
- encouraging a reduction in the labor force through retirement,
- redistributing income from young savers to older consumers, and
- reducing the incentive to save for retirement.
Steuerle provides a set of equity and efficiency criteria that may be used to evaluate alternative Social
Security reform proposals.
- Henry J. Aaron, "The Myths of Social Security Crisis: Behind the Privatization Push"
http://www.brook.edu/views/op-ed/aaron/19960721.htm
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.
- L. Randall Wray, "The Emperor Has No Clothes: President Clinton's Proposed Social Security Reform"
http://www.urpe.org/SSWrayEmperor.pdf
In this Jerome Levy Economics Institute Policy Brief (No. 2, 1999), L. Randall Wray argues that it is not
possible to use current federal budget surpluses to pay for future social security liabilities.
He notes that higher levels of social security expenditures in the future will require that
a larger share of future output be received by retired individuals. Wray suggests that plans
to "save" social security can only be effective if they increase the nation's ability to produce
goods and services in the future. He suggests that the most efficient method of paying for
future increases in social security expenditures is to increase future tax rates since
it is these workers who will ultimately bear the cost of the increased social security expenditures.
- Dean Baker, "Privatizing Social Security: The Wall Street Fix"
http://www.epinet.org/content.cfm/issuebriefs_ib112
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.
- RAND Research Review, "Social Security Reform: Touching the Rail"
http://www.rand.org/publications/randreview/issues/RRR.winter95.6.aging/ss_reform.html
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.
- Economic Policy Institute, "Social Security Isn't Broken: Why Does Wall Street Want to Fix It?
http://www.epinet.org/Paycheck/proto3.pdf
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.
- Jerry L. Mashaw and Theodore R. Marmor, "The Great Social Security Scare"
http://www.prospect.org/web/page.ww?...&articleId=4876
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
http://www.socsec.org/
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.
- The White House, "Retirement Security"
http://www.whitehouse.gov/infocus/retirementsecurity/index.html
President George W. Bush's plans to reform Social Security are discussed on this web site.
- Committee to Strengthen Social Security
http://csss.gov/
This website contains information released by the Commission to Strengthen Social Security. This Commission was formed in
May 2001 and issued its final report on December 21, 2001. This report provides a discussion of three alternative reform plans.
Each proposal introduces some degree of privatization.
- Economic Policy Institute, "Social Security"
http://www.epinet.org/content.cfm/issueguide_socialsecurity
This May 2005 Economic Policy Institute Issue Guide presents arguments against the privatization of
Social Security. They suggest that the Bush Administration's privatization proposals would
"erode a vital social insurance program that provides American workers and their families
with a core level of income during retirement, disability, and early death." Links are
provided on this page to a Social Security FAQ and a document containing Social Security statistics.
- AFL-CIO Social Security Web Site
http://www.aflcio.org/socialsecurity/
This web site contains the AFL-CIO's arguments in support of preserving the existing social
security system.
- Estelle James, "Social Security Reform in Other Nations"
http://www.heritage.org/Research/SocialSecurity/hl618.cfm
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.
- José Piñera, "Testimony before the Committee on Ways and Means Subcommittee on
Social Security" - September 18, 1997
http://www.cato.org/testimony/ct-jp091897.html
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.
- The Century Foundation, "Chile's Experience with Social Security Privatization: A Model for the United States"
http://www.socsec.org/publications.asp?pubid=332
The Century Fund analyzes the advantages and disadvantages of the privatized social security system introduced in Chile.
They find that the assets of the Chilean pension system has grown dramatically to about
40% of Chilean GDP in 1995. This report notes, though, that there are some problems with this system.
It has been characterized by very high administrative costs and primarily benefits high-income
individuals and the insurance conglomerates that manage the funds. A study by Hemant Shah is cited
that indicates that "commissions reduced individuals' average rates of return between 1982 and 1995
from 12.7% to 7.4%, and between 1991 and 1995 from 12.9% to a mere 2.1%." There is also substantial
evidence of underreporting of income to reduce contributions. It appears that the fund will not
be sufficiently large to cover the cost of age-old security for a substantial portion of Chilean
citizens. Women, in particular, are at a disadvantage since they have longer life expectancies but
lower average earnings (and therefore lower retirement funds).
- L. Jacobo Rodríguez, "Chile’s Private Pension System at 18: Its Current State and
Future Challenges"
http://www.cato.org/pubs/ssps/ssp17.pdf
L. Jacobo Rodríguez argues that the Chilean private pension system has been remarkably
successful in providing retirement benefits to Chilean workers. While he recognizes that
there have been some problems with high administrative costs, Rodriguez believes that this is
partially the result of limited competition and measurement problems.
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- Thomas R. Saving, "Answering the Myths about Social Security"
http://www.ncpa.org/pub/ba/ba509/
Thomas R. Saving provides information about the financial status of the Social Security and Medicare
programs in this March 22, 2005 online policy brief. He argues that the funding crisis for these programs
should be dealt with immediately to prevent the cost of dealing with the shortfalls from being more
severe in the future. He recommends a movement to private retirement accounts.
- Michael Kremer, "Restructuring Social Security Taxes"
http://www.brookings.org/comm/policybriefs/pb40.htm
In this December 1998 Brookings Policy Brief, Michael Kremer argues that the first $5,000 in earnings
should be exempted from Social Security taxes for youth. He argues that this would reduce the burden
of tax on those with low earnings and would have a positive effect on the labor supply of young
workers (since labor supply is more elastic for young workers than for older workers).
- Alan Greenspan, "Future of the Social Security program and economics of retirement"
http://www.federalreserve.gov/BoardDocs/Testimony/2005/20050315/default.htm
In this March 15, 2005 speech, Alan Greenspan discusses economic issues associated with the
Social Security system. Declining fertility rates, longer lifespans, and a decline in
age at retirement have resulted in a situation in which fewer workers will be supporting the
retired population. This problem would be less severe if:
- labor force participation rates increase for elderly individuals,
- saving rates increase (allowing for the production of more physical capital), and
- social Security retirement benefits are reduced.
Greenspan argues that steps should be taken now to ensure that there are sufficient real resources
available to get the U.S. through the retirement of the baby-boom generation. He suggests that a
partial privatization of Social Security could help achieve this goal by providing more real savings.
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