Facing Reality About Social Security

MAY 2005 - The future of the Social Security program is probably one of the most important challenges that will confront our nation over the next century. Some claim that those who say Social Security requires an immediate fix are just crying wolf, and that any problems can be solved with minor adjustments over time. But they’re choosing to ignore that Social Security has long existed in a land of myth, with figures and misinformation used to serve political agendas. Ignoring fiscal reality, however, is hardly the way to make major public policy decisions that affect every American. The country’s shifting demographic trends mean that, without reform, the current program simply won’t be adequate to sustain future generations.

Analysis Beyond Emotional Issues

The AICPA recently updated its seminal analysis of Social Security, first issued in 1998. You can access this study via our website, CPAs have a special responsibility to educate citizens about fiscal realities, and I encourage you to read the AICPA report and to discuss the subject among yourselves and with your clients, family, and friends.

David A. Lifson, who, with fellow NYSSCPA member Laurence Keiser, has been helping the Society and the media sift through the various issues that obscure rational analysis of Social Security, focuses on what he calls the “eternal triangle”: benefits, return on investment, and taxes or other funding. The solvency of Social Security requires balancing all three factors over time; changing one will affect the other two.

The future viability of Social Security depends upon the taxes collected, the return on investment of surplus taxes over time, and the benefits paid out. The AICPA’s analysis projects that these factors will cause the Trust Fund to be depleted by the 2040s. If these projections prove accurate, keeping the program afloat would require that we, as of today, enact a $3.5 trillion funding infusion, increase the payroll tax by 1.9% (from 12.4% to 14.3%), or reduce benefits by 12.6%. If no changes in funding or investment are made, benefits would have to be reduced by 27% after the surplus is exhausted.

The Social Security funding issue is also inextricably tied to other social and healthcare-funding factors. The number of people receiving Social Security benefits, the costs of living, and the costs of healthcare will be vastly different in the not-too-distant future. For many reasons, including the fact that people now live longer and therefore need more (and more costly) medical treatment, the Medicaid and Medicare program costs are growing faster than the costs of the Social Security program over the same period of time. Social Security’s benefit goals and funding requirements should be placed in the context of seniors’ changing needs and the government’s overall fiscal outlook.

No Simple Solutions

The current debate over individual accounts is part of the larger question of whether people should be allowed to invest retirement savings in stocks, which produce greater returns but entail greater risks, or in less-risky bonds; only in federally insured savings vehicles; in a combination; or a new type of investment. Return to the eternal triangle: If taxes and benefits are assumed to be constant, resolving the Social Security funding deficit requires greater return on investment—and, most likely, greater risk, to be borne by the individual or the government.

The fact that there is no simple solution makes the situation more dangerous, because major changes like this take time to show results. It will require patience to implement a plan and follow it through without being distracted by another crisis or political agenda. We can’t afford those kinds of games anymore.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA