Evan Soltas
Sep 3, 2012

The Security of Social Security

After President Bush won re-election in 2004, he made a major effort for the privatization of Social Security. Bush wanted to create a system of personal retirement accounts and break up the system of "pay-as-you-go," but his plans were received poorly. By October 2005, however, the plan was dead in the water.

Today, Republicans speak only vaguely about Social Security, and the focus has shifted to Medicare and Medicaid reform, whose fiscal problems are more urgent. And yet, Social Security does have long-term challenges which did not disappear when public discussion of reform did. In this post, I look at the security of Social Security and the options for reform, including partial privatization.

Studying the 2012 OASDI Trustees Report -- see the summary here -- it was plainly obvious to me that Social Security's finances are in poor, but not disastrous, shape. (Medicare and Medicaid's finances are disastrous.) For the first time since 1983, Social Security expenditures exceeded non-interest revenue in 2011. 2011 further marked the high point for the OASI trust fund, as measured by the number of years current benefits could be sustained on its resources alone. It is all downhill, albeit slowly, from here on out.Absent reforms, 2033 will mark the full depletion of the OASDI fund (including disability insurance), at which point all benefits will be subjected to an immediate 25 percent nominal per capita cut, which brings expenditures back in line with payroll tax revenues.

That is an outcome no one wants. There are three broad paths for action: increase revenues, decrease expenditures, and increase interest income.

This AARP study outlines the options for reform and their effectiveness in closing the long-term financial shortfall of Social Security. Looking at this objectively, I found it pretty easy to mix-and-match plans which would bring finances into order without disproportionately affecting any single demographic group. AARP gives enough reform paths to restore Social Security's financial sustainability several times over.

It seems to me that the path of least resistance lies in increasing the full-benefits retirement age gradually to 70, ending preferential tax treatment for Social Security benefits relative to private pensions, means-testing benefits by adding a "third bend point" for wealthy recipients, and increasing the maximum threshold for taxable earnings -- say, to $200,000 in 2012 current dollars by incremental hikes of the Social Security Wage Base.