Q&A: The great Social Security debate

Q: Social Security seems to have been working fine for decades. Why is there a problem with it now?

A: The underlying cause of most of the current fuss about Social Security can be summed up in two words: "aging population." In the not-too-distant future, the US baby boom is going to begin hitting retirement, and wave upon wave of boomers will begin trading paychecks for Social Security payments. The raw numbers are amazing - in 2000, there were about 35 million Americans age 65 or older. By 2050, there will be 87 million, an increase of well over 100 percent.

The number of retirees will thus rise much faster than will the number of young people in the workforce. This disparity is important, because money from the payroll taxes of current workers is what the government uses to pay the benefits of today's recipients.

Back in 1950, each person on Social Security was financed by the taxes

of about 16 workers. Today, the ratio is about 1 recipient per every 3 workers. By 2050, it will be about 1 recipient for every 2 workers.

One important caveat - this demographic picture is complicated by the fact that Social Security is much more than a retirement program. It also pays benefits to disabled workers and their dependents; spouses and children of retired workers; and the survivors of deceased workers.

Thus Social Security is huge - the single largest program of the American government. This year alone it will pay out $500 billion, constituting almost a quarter of all Washington's spending.

The current cash crunch aside, the program has also been hugely successful. Take just one measure - poverty among the elderly. In 2000, 48 percent of Social Security recipients would have been poor without their government check, says the Government Accountability Office (GAO).

A targeted antipoverty program might arguably have accomplished that same goal more efficiently. But the poverty issue shows the potential emotions and sensitivities that could arise as lawmakers consider changes in the system.

"It is precisely because the program is so deeply woven into the fabric of our nation that any proposed reform must consider the program in its entirety, rather than one aspect alone," said David Walker, Comptroller General of the US, in a February testimony to the House Budget Committee.

A: That depends on the meaning of the word "bankrupt." Let's put it this way: If nobody does anything to fix the system, in just under 40 years it will hit a financial wall, according to Social Security's own numbers, and be forced to implement an immediate 30 percent cut in benefits. Technically, it wouldn't be in Chapter 11. But the cries of outrage from beneficiaries would probably be so loud that members of Congress could hear them without having to pick up their phones.

As virtually every worker in the US learned when they read their first pay stub, and were shocked at the sums deducted for taxes of various sorts, Social Security is financed by a 12.4 percent payroll tax levied on the first $90,000 of annual wages.

Right now, the money raised by this tax is more than enough to pay today's Social Security recipients. But as the baby boomers retire (see above) that will change. By 2018 or so, annual taxes won't equal annual benefits, according to Social Security data. Social Security will have to begin drawing on the Treasury bonds it bought with its surplus cash during its recent flush times.

Any change in Social Security's cash flow from black to red would likely be important for political, as well as financial, reasons. Social Security is part of the overall federal budget, and right now its surplus is making the deficit look less bad than it is. (That's hard to imagine, given the $422 billion size of the 2004 deficit, but it's true.)

Page: 1 | 2 | 3