Federal Reserve Chairman Alan Greenspan is no politician. He proved that in his recent testimony before Congress, speaking the unspeakable truth that the future costs of the Social Security program are unsustainable and (gasp) cuts will be needed. As a result, for the first time since its inception, Social Security could become a major campaign issue in this fall's election.
The value of Mr. Greenspan's testimony is that it highlights the undeniable need for Social Security reform. The fiscal facts are frightening - and are corroborated by other respected and nonpartisan voices, including the General Accounting Office (GAO) and the Congressional Budget Office (CBO). The financial crisis facing the Social Security system is driven largely by the impending retirement of the baby-boom generation. Eligible for retirement beginning in 2008, these 78 million Americans will quickly overwhelm the ability of the system to pay promised benefits.
For nearly 70 years, the "pay as you go" nature of the Social Security system has worked reasonably well. Still, on numerous occasions, the payroll tax has been increased to ensure enough annual revenue to pay promised benefits. When first enacted, the Social Security payroll tax of 2 percent applied to the first $3,000 of a worker's income. Today the tax is 12.4 percent on the first $87,900 of income.
But the baby-boom generation is twice as large as the current crop of retirees - and soon there will not be enough paying workers to finance the program.
The numbers are relentless. The most recent Social Security trustees' report calculates that by 2018, payroll taxes will be insufficient to cover annual Social Security benefits.
At present, there are approximately 3-1/2 workers for every retiree. But by 2030, when baby boomers are fully retired, there will be only two workers per retiree. Clearly, something has to give - and Greenspan's testimony alerts us to the fact that doing nothing is not an option.
In response to Greenspan's alarm bell, many politicians will insist that the Social Security trust fund will buy us some time. But, in reality, the trust fund is not a government asset, it's a liability. Why? Because the payroll-tax surplus has been used routinely to mask overspending in the rest of the federal budget. Special Treasury bills have been issued to the trust fund. However, they amount to no more than an IOU. The only way to honor these trust-fund obligations is to raise taxes, cut other government programs, or borrow money. Obviously, none of these is a particularly attractive option.
For his part, in his State of the Union message, President Bush proposed using a portion of payroll taxes to create personal-investment accounts for American workers. I was a member of the president's bipartisan Commission to Strengthen Social Security, and I agree that personal accounts should be part of the system in the future. Critics will rightly argue, however, that creating voluntary personal accounts for younger workers will be a fiscal challenge, given the already costly obligations of supporting the baby-boom retirees.
When it comes to strengthening Social Security, our commission acknowledged that there is no free lunch. But we also made clear in our report that tomorrow's retirees have been promised Social Security benefits much higher than those received by a retiree today with a similar work history. Accordingly, we proposed that, in the future, basic benefits be adjusted for inflation - but no more. By applying these savings, we were able to develop a reform plan that (over time) returns Social Security to financial balance, while also establishing private accounts. These private accounts represent a nest egg that younger workers can use to supplement their retirement income, leaving them better off than they would be under the traditional system.
Several members of Congress have submitted Social Security reform plans, and bipartisan interest in reform is growing. However, as the campaign heats up, there will be a temptation by others to play politics with this issue. Voters will not be well served by scare tactics or slogans. Candidates who pledge to protect the Social Security status quo are offering a false promise. Both the GAO and the CBO have warned that meeting Social Security's future costs would require increasing payroll taxes by nearly 50 percent or reducing promised benefits by roughly 30 percent. That approach would mean that younger workers would pay more - while getting less. Clearly, we need to do better than that.
Greenspan has set the stage for an election-year debate about Social Security's future. In the final analysis, what is important to the American people are the answers to the following questions: How will benefits be paid to the retiring baby boomers once payroll taxes fall short of annual benefits? By raising taxes? By increasing debt? By an infusion of general revenues at the expense of other defense and domestic priorities? How will private accounts be financed? How will they be structured? Can we find a solution that is fair to the baby-boom retirees - while also fair to their children and grandchildren?
The answers will depend on an election-year debate that is both high profile and high caliber. Let's hope we get it.
• Tim Penny, a former Democratic congressman from Minnesota, is chairman of the national advisory board of For Our Grandchildren, a Social Security education program. He was also a member of President Bush's bipartisan Commission to Strengthen Social Security.