Here is some info on one of the main conservative proposals to fix the problem:
Background
While the debate on reaching a balanced budget by 2002 continues to rage, how many people have stopped to ask "What happens after 2002?" The answer is alarming. Social Security and other entitlements will swallow up federal revenues leaving Congress with little discretion over spending. Currently, entitlements account for 64 percent of spending. Even under the Balanced Budget Act of 1995, they would rise to 72 percent of spending by 2002. By 2030 entitlements are projected, under current law, to rise to over 20 percent of the Gross Domestic Product. The entire budget today is 22 percent of GDP. These numbers are staggering when compared to only 30 years ago when entitlements were only 5 percent of GDP and 30 percent of total spending.
Social Security alone accounts for approximately 34 percent of entitlement spending and faces an approximate $4 trillion unfunded liability over the next 75 years. Put another way, we would need $4 trillion in real assets today (instead of a government trust fund filled with non-negotiable IOUs), in order to pay promised benefits. Obviously the $496 billion of non-marketable IOUs the Social Security Trust Fund held as of July 1, 1996 does not measure up. Our other options are to cut benefits across the board by 14 percent starting today, or raise payroll taxes by 16 percent.
Why did this problem occur?
Demographics, Demographics, Demographics
The Social Security system was designed in 1935 as a pay-as-you-go system, in which current workers support current retirees. This Ponzi scheme worked when America had 17 workers per beneficiary in 1950 ("Shockwave" Graph), but that ratio has fallen over time. Currently there are only 3.3 workers per beneficiary, and by 2060 this is projected to fall to 1.8 workers per beneficiary. To pay benefits to the rising number of retirees, the government has increased FICA taxes on a shrinking portion of the population. These taxes have been increased 36 times since 1970.
Secondly, life expectancies have risen substantially since the system was established in 1935. The original retirement age for Social Security was 65 when life expectancy at birth was 63. Social Security was designed to support the elderly who lived longer and could no longer work. Life expectancy today is 76, and is projected to grow to 81 over the next 75 years. Of course this assumes we don't find a cure for cancer, heart disease, or AIDS in that time period. Yet the normal retirement age today is still 65 and is scheduled for only a slight increase to 67 under current law.
The system will be hit with a triple whammy over the next 20 years: (1) the number of retirees is rising, (2) retirees are living longer, and (3) fewer workers are paying taxes to support them. In addition, these workers have to support more generous benefit payments than in 1945, and a yearly cost-of-living increase.
The Trust Fund Myth
It is time to tell the public that the Social Security Trust Fund does not really exist. The notion of a trust fund implies that there are productive assets earning interest to be drawn down sometime in the future. But this is not the case with the Social Security Trust Fund.
Budget rules have allowed the government to invest all surplus dollars coming into the trust fund in non-marketable special government debt. The government simply collects the surplus revenue entering into the trust fund, replaces it with non-marketable government debt in the same amount, and then uses the money from the surplus for other government spending. Using these accounting rules, any normal trust fund would be doomed to insolvency. Imagine parents trying to set up a trust fund for their children, earmarking $1000 of their salary each year for their children's education. The parents spend $800 of that $1000 on their oldest child, already in college, and place the remaining $200 into their trust fund for their younger child. But using federal budget rules, the parents could spend all of that $1000 and simply issue themselves an IOU, which earns interest, for the $200 in the trust fund. When the younger child heads off to college, he finds an education trust fund filled with IOUs and no actual money. His parents, the "underwriters" of the trust fund, would be forced to pay for the child's education out of their salary -- in essence, using their current earnings to pay for all expenses. This is the way the Social Security Trust Fund is managed.
Of course the difference between the household and the Federal Government is the government can raise its "salary" anytime through taxation. This amounts to saying, "Generation X, you owe the Baby Boomers your earnings to pay off these bonds." Had Congress decided to invest these surpluses in marketable assets, we may have been in better shape. But the surplus invested as it is under current law was never enough to cover the coming crisis.
The shortfall will become acute not in the distant future, but in just 10 to 16 years. When the Baby Boomers begin to retire, revenue will not be adequate to cover costs, and the government will have go deeper into debt, raise taxes, or reduce benefits.
The Scope of the Problem
In 1996 the federal budget debt from deficit spending will be $5.1 trillion. That is small compared to the looming $11 trillion unfunded liability for Social Security, Medicare, and federal pensions. We must address this problem now while we still have time to fully fund Social Security and ensure that everyone will have retirement benefits without devastating our economy. The longer Congress and the President wait to solve the problem the more drastic the solution.
Goals of the Legislation
If we want to bring Social Security under control there are three options: reduce benefits, raise taxes, or develop a privatization strategy to replace benefits. The first two have become the "third rail" of American politics, making the third option attractive to many. Waiting to solve the problem is not an option.
The system needs to be redesigned to include a significant private portion for retirement security and reduce the government's role in people's retirement. We must balance the system while maintaining our commitment to current beneficiaries. We must also maintain a safety net for all retired Americans, ensuring that no one will be left penniless upon retirement.
We must restore Social Security to long-term solvency. Too often politicians push quick-fixes that look good through five-year budget windows but have disastrous consequences for our children. A good example is the 1983 crisis in Social Security. The system faced bankruptcy and a bipartisan commission recommended changes to "restore" the Social Security system. In the end Congress raised taxes, reduced benefits, and came up with the "Social Security is off budget" claim, instilling a false impression that Social Security funds would remain untouched. These changes solved the short-term problems and mitigated some of the long term problems, but stopped short of making the structural changes necessary to put Social Security on sound financial footing.
house.gov
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