"Who pays for what?" This is the central question in public finance. But this one question is actually two questions: "who pays?" and "for what?" When we look at the looming crisis in Social Security, these are the central issues.
Social Security has been running surpluses for over 25 years, and is expected to run a surplus growth to $4.3 trillion until 2023. But if nothing changes, after 2023, surpluses will be used to pay benefits. Consequently, some estimates say that we are only going to be solvent - when Social Security assets are greater than liabilities; i.e. positive balance - until 2036. At that point reserves would be depleted and experts are predicting that we are not going to have enough money to pay Social Security benefits that we have been promised for retirement or disability. I say we because I am 34 and I am in this pool of future beneficiaries.
To fix this, we usually hear that we either need to 1) reduce benefits; 2) raise taxes; or use 3) some combination of these two options.
But how can drastic action be necessary when the Social Security trust fund reportedly has over $2.4 trillion in it at present? This is a misleading sleight-of-hand. Here is how.
Technically, there is no trust fund; no money is or was ever intended to be "set aside" for beneficiaries. Social Security operates as a pay-go system - today's workers are paying for today's beneficiaries.
The current Social Security surplus money taken in today is used to buy U.S. Treasury bonds. The Social Security Administration holds these bonds until they need to redeem later. Meanwhile, the Treasury uses the money it gets for the bonds sold to the SSA to fund other federal expenses. As such, Social Security just has a lot of IOUs from the Treasury. And since the Treasury has all these IOUs and has spent the money it got for these bonds, this arrangement actually contributes to our future deficit. Moreover, when the time comes to pay these Treasury-held IOUs to the SSA, in the not-so-distant future, we probably won't have the money and we will either have to cut benefits, or borrow from another country, which will increase our national debt.
Blame politicians on both sides of the aisle.
Complicating the issue, we have to keep in mind that as the cost of living increases, some Social Security researchers and administrators argue that "benefit enhancements" are necessary. But considering that budgets are as tight as they are, should benefit enhancements even be included in proposals when considering that Social Security has long-term financing problems? I think that they should be, and here is why.
Not including proposals for benefit enhancements does not consider the realities that many recipients of Social Security confront. Social Security, in its current form, is facing more than just problems of fiscal deficit; it also faces the problem of benefit adequacy. Because benefits are not indexed to keep pace with wage growth and are increasingly inadequate - the average beneficiary receives a paltry $1,075 a month. Besides, "proposals" can always be rejected, but categorically taking proposals off the table ignores important issues.
When considering that many caregivers, who are usually women, have to take time off of work to care for a child and other dependents, they have paid less into the system and can expect less in return.
Also, consider that seniors are now living longer than was ever anticipated and private pensions that many seniors depend on are not keeping pace with increasing costs of living. For many, Social Security means the difference between living in poverty or not. It is a choice that we make as a nation to either allow many retired elders or disabled people with legitimate needs to "go with" or to "go without." These are compelling reasons to consider benefit enhancements.
Another unresolved issue is: who is going to pay? Several Tea Party politicians have limited their ability to fix this problem in stating that they won't raise taxes. I am not saying that we should raise taxes, but taking this option off the table over ideological opposition really limits what one can do.
To the question: who pays for what? Some ideas are better than others. The most unpopular ideas are probably the ideas that could solve Social Security's fiscal problems and guarantee benefits for all.
The point is that to keep faith with current beneficiaries and future retirees, attempts at reform best not take anything off the table: not raising taxes, not cutting benefits, and not even benefit enhancement proposals.
PAUL HEROUX of Attleboro is a graduate of the London School of Economics, is currently a master's candidate at Harvard University, and can be reached at Paul_Heroux@hks11.harvard.edu.