Economic Growth Alone Can't Fix Social Security Cato Institute Project | February 3, 2005 http://www.socialsecurity.org/daily/02-03-05.html President Bush should be commended for tackling a political challenge like Social Security reform, says a recent op-ed in the Rocky Mountain News, and opponents of reform ignore the program's unstable future at their own peril. Some critics of personal accounts have suggested that faster economic growth alone will keep Social Security solvent. But such growth, while pushing up wages and bringing in more payroll taxes, also increases Social Security's benefit obligations. Furthermore, the benefit obligations to the baby boomers nearing retirement will likely force Congress to raise payroll taxes, a move which will discourage economic growth. Excerpts from the op-ed follow. "�The problem is relatively straightforward: Payroll taxes at current levels are woefully insufficient to fund the benefits of 77 million baby-boom retirees. According to the most recent report of the trustees of the Social Security trust fund, this imbalance over time will lead to a projected $10.4 trillion in unfunded liabilities (promised benefits), plus $1.5 trillion to redeem the Treasury bonds in the Social Security Trust Fund. "This is an unsustainable trajectory, but not a few opponents of reform would prefer to ignore the math. In the late 1930s, when Social Security was in its infancy, there were 41 workers for every retiree. With rising life expectancies and declining fertility rates, the ratio plunged. It fell to 16 to one in 1950. It is now three to one and expected to fall to two to one by the time today's young workers retire. "Meanwhile, real rates of return have plummeted. When the payroll tax was 2 percent in the 1930s, the average rate of return for retirees was as high as 110 percent. Payroll taxes are now 12.4 percent of wages, but most young workers can expect future returns of less than 1 percent. "Those who dispute this is a crisis-in-the-making (such as New York Times columnist Paul Krugman, who appears on our pages) insist taxes plus interest on the trust fund's Treasury bonds will cover promised benefits until 2018 and that the fund won't run dry until 2042. But nothing could be more misleading. In fact, Social Security will start running a deficit in 2018 when benefits exceed annual payroll tax revenue. The roughly $1.5 trillion trust fund surplus that currently exists, and which will grow to $3.2 trillion in today's dollars by 2018, is not a pot of cash. By law the surplus is invested in Treasury bonds and used to finance other government spending. (The Clinton administration called the trust fund a 'bookkeeping' entry.) In order to redeem these bonds, Congress must raise taxes, cut spending or increase borrowing (or some combination of the three). And even if the trust fund were a pile of cash, it would cover shortfalls only until 2042 (according to the system's trustees), or 2052 (according to the Congressional Budget Office), when it would be completely exhausted. "There's a let-it-alone school of thought that suggests faster economic growth will keep Social Security intact, even as spending on the program becomes an ever-larger share of gross domestic product. But such economic growth, while pushing up wages and bringing in more payroll taxes, also increases Social Security's benefit obligations. "As the Social Security trustees themselves warn, the longer Congress dawdles the deeper the cuts in benefits or steeper the increases in taxes that will be needed. "The president's reform plan is to allow workers to divert some Social Security payroll taxes to private investment accounts. It won't completely solve Social Security's funding shortfall, but could go a long way toward reducing its unfunded costs, as well as boost national savings." ------------------------ Yahoo! Groups Sponsor --------------------~--> Has someone you know been affected by illness or disease? Network for Good is THE place to support health awareness efforts! http://us.click.yahoo.com/RzSHvD/UOnJAA/79vVAA/NJYolB/TM --------------------------------------------------------------------~-> �������������������������������������������������������� This is ZESTEconomics. Post economics-related articles and event info to [email protected] If you got this mail as a forward, subscribe to ZESTEconomics by sending a blank mail to [EMAIL PROTECTED] OR, if you have a Yahoo! 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