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Social Security: Do We Have to Act Now?

Testimony Before The Senate Special Committee On Aging

Today's trust fund reserve is $1.7 trillion, and another $155 billion will be added in 2005. This surplus is invested in special U.S. Treasury bonds that currently generate almost $90 billion in interest at an average rate of 6% for the trust fund. These bonds are backed by the full faith and credit of the United States. This means that the nation is fully obligated to honor them when they are redeemed.

Annual payments into the trust fund —payroll contributions and dedicated taxes— are projected to exceed annual benefit payments until 2018. By then, the rising number of boomer retirees will have caused benefit payouts to rise. At that point, some of the interest that accrues each year will have to be combined with payroll and income taxes to pay retirees. In other words, the Treasury will have to make interest payments to the Social Security trust fund in cash rather than bonds.

2018 is a significant date for Social Security. It is important not because the program is in financial trouble at that point, but because the rest of the budget may be in trouble due to unsustainable fiscal policies. After more than 30 years of borrowing from Social Security, the U.S. Treasury will be called upon to transfer cash resources back to the trust fund. Right now the rest of government is borrowing more than $150 billion a year from Social Security, which Congress is using for various purposes at home and abroad.

So, 2018 is a problem not for Social Security but for Congress. Fiscal policy therefore is the cause for concern, not the ability of Social Security to continue to pay full benefits.

The situation changes again in 2028. Then, the annual payout will begin to exceed annual income plus interest earnings, and the bonds that the trust fund holds will need to start being redeemed. The Social Security actuaries conservatively project that the trust fund balance will be depleted by 2042. However, even after that date, Social Security will not be "bankrupt." Annual collections from payroll taxes would be sufficient to pay over 70 % of promised benefits.

The Congressional Budget Office (CBO), charged with projecting the costs of legislation for the U.S. Congress, has created an alternative model. Their model estimates that 2052, not 2042, as the possible trust fund depletion date, and only a 1% of payroll gap between income and benefits over the coming 75 years, assuming no changes.

This is significant because the CBO is using a very sophisticated new econometric model. Various economic and demographic assumptions plugged into the model result in a broad range of projected outlays and a narrower -but still significant- range of program income. This serves to point out that there is not just one "solution" to Social Security's "problem". The CBO entry into the debate is also significant because the current long-term imbalance looks only half as big through the CBO lens. The short-term cash flow is estimated to be the same. If the CBO projections are correct, more modest changes would be sufficient to guarantee current obligations and continuous trust fund solvency.

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