November 1, 1996

A Primer on Social Security Reform

Download Special Report No. 66

Special Report No. 66

Executive Summary The Social Security system once again faces financial trouble, despite the fact that payroll tax increases were enacted in 1983 to keep the system solvent. This time around, the Social Security Administration projects that the system will become bankrupt in the year 2031. Yet, the financial implications of this bankruptcy will confront taxpayers 16 year s sooner, in the year 2015.

The historical and projected growth path of expenditures and tax collections are expressed as a percentage of taxable payroll. The tax collections consist of dedicated payroll taxes and, since 1985, the revenue dedicated to the Social Security Trust Fund derived from the income taxation of Social Security benefits. A major mismatch between Social Security expenditures and tax collections confronts U.S. taxpayers and Social Security recipients.

However, the pending insolvency of the Social Security system is only one-half of the story. The other half is that most future retirees can expect to lose money on Social Security when it is evaluated as an investment program for retirement.

Consequently, the challenge – and urgency- of reforming Social Security is not simply to restore solvency to the system, because any reforms (like payroll tax increases) undertaken with solvency as the sole goal will make Social Security an even worse retirement program for future retirees. The challenge is to devise a reform program that simultaneously honors the promises made to current (and near-term) retirees and offers today’s working population a better financial future.