The Basic Problem of Social Security Reform

A brief primer, for anyone who's interested:

For more than 70 years, the federal Old-Age, Survivors, and Disability Insurance program (OASDI) – commonly known as Social Security – has provided social insurance to a substantial number of American citizens. Though it was initially envisioned as a safety net for elderly retirees, the program has been expanded intermittently since its inception to include additional categories of Americans. In 2005, the Social Security Administration (SSA) disbursed benefit payments to more than 47 million Americans, with retirees still composing the largest group of beneficiaries (28 million).

The OASDI program is financed through a dedicated federal payroll tax, and its revenue stream depends entirely on current wage earners. In recent decades, the ratio of wage earners to retirees has narrowed substantially as birthrates have declined and life expectancies have increased. With the Baby Boom Generation beginning to collect benefits, this “dependency ratio” will continue to tighten, further diminishing the program’s revenue base in the upcoming years. By 2016, the OASDI program’s outlays to beneficiaries are expected to exceed revenues. Thus, if current trends continue, the Social Security program will likely face a long-term deficit in the coming decades.

Reforms passed in the early 1980s have enabled to the OASDI program to move away from its original pay-as-you-go structure and build up a substantial revenue surplus. These additional monies have been invested in U.S. securities and placed in trust. While the assets in the Social Security Trust Fund will help to maintain payments to beneficiaries after OASDI outlays begin to exceed revenues, these assets can only fill the revenue gap for a short time. According to best-guess assumptions, the Trust Fund will be depleted as early as 2037. After this point, projected receipts from payroll taxes will only cover approximately 76 percent of all benefit payments.

The goal for policymakers and other interested parties is to address this looming deficit crisis, and to confront the trade-offs among different reform options. There are a number of important considerations in crafting a solution to the problem of Social Security reform. Those who seek to resolve the deficit crisis must first develop a set of evaluative criteria to assess the impact of various policy options. Applying these criteria to different options will enable decision-makers to systematically assess the merits of each approach, and then choose the most appealing alternative.