Social Security

Social Security, the nation's retirement system, is one of the most popular government programs in U.S. history. But now that the first of the 76 million baby boomers have started retiring -- and are projected to live longer than any previous generation of Americans -- the question is how this program can be sustained.

An estimated 10,000 people a day will become eligible for Social Security benefits over the next two decades, putting an unprecedented strain on the system. In less than a decade, in 2017, Social Security is scheduled to start paying out more in benefits than it collects each year in payroll taxes. If left alone, the Social Security trust fund is projected to run dry in 2041. Sometimes people say the system will be bankrupt at that point, but that isn't really true. Social Security would still receive tax revenues and still function – but it could pay only about three-quarters of promised benefits to retirees.

Nearly everyone supports keeping it going, but no consensus has emerged, either in Washington or among the public at large, on what approach the government should take.

At the same time, Americans as a nation only save a miniscule percentage of their income, and individual investment plans (like the popular 401K) have been battered by the dip in the stock market. That may leave Americans' own resources dwindling even as the government safety net begins to fray.

How Social Security Works

Nearly all Americans over 65 collect monthly Social Security benefits, the backbone of the nation's retirement income system. Social Security was originally designed to provide one leg of a "three-legged stool" for retirement security, the others being savings and a pension. Now, however, as many companies have moved away from traditional pensions and fewer people have adequate personal savings, Americans have become increasingly reliant on Social Security.

The Social Security Administration says that about a third of the recipients depend on Social Security for more than 90 percent of their income, while another third rely on the program for more than half of their money. The agency estimates that about 13 million would fall below the poverty line without Social Security.

Social Security is a "pay-as-you-go" insurance program, meaning that the current workforce pays for the benefits of the current retirees. And, eventually, when people who are working now become retirees, their benefits will be paid by those who are working in the future. Employees pay 6.2 percent of every paycheck toward Social Security, and their employers pay the same amount as well. So today's workers won't get back "their" money when they retire; the money taken out of their paychecks today go to those receiving Social Security today.

In 1950, there were 16 workers to support every one beneficiary of Social Security. Today, there are only 3.3 workers for every retiree. By 2030, the ratio will fall to an estimated 2.2 workers per retiree. Fewer workers today will mean fewer Social Security dollars later, when those same workers retire.

Americans become eligible for Social Security benefits at age 62. But if they retire then, they receive a smaller amount then than if they wait until age 66, when full benefits kick in. Only about 5 percent of retirees, however, wait until after they've reached full retirement age to claim benefits, preferring to take the decreased amount instead of working a few years longer.

Trust in the Trust Fund?

With the baby boomers still in the workforce and paying in to the system, Social Security has been running a surplus. Since everyone could see this demographic problem coming, the government set up a "trust fund" for this extra money. When the system starts to fall short of tax revenue in 2017, Social Security will be able to draw on this trust fund to keep paying full benefits until 2041.

The problem is that this trust fund isn't billions of dollars in cash sitting in a bank somewhere. The federal government has borrowed the surplus money from the fund to pay its year-to-year bills, giving the fund Treasury bonds in return. There's nothing illegal or secret about this. But what it means is that when the trust fund needs its money in 2017, the government will have to pay it back. The risk isn't that Social Security won't pay its benefits, at least not for a long time; it's that the cost of keeping up with those benefits will put an increasing strain on the federal budget. That means the government may have to raise taxes or cut other programs to keep Social Security going.

Dodging bullets, deferring reform

Over the years there has been some bipartisan support for looking at the long-term financial health of the program. Most experts say the sooner we do something, the easier the changes will be for everybody. The Social Security trustees say that if the government were to act now, the program could be maintained as is for another 75 years by either cutting benefits by 13 percent, or raising the payroll tax by about 16 percent. But if the government were to wait until later, the tax increase or benefit cuts would have to be more dramatic to get the same effect.

Prominent recent proposals to fix the system reflect the bipartisan desire to make reform as painless as possible. One possibility is to raise the cap on income subject to the Social Security tax — currently $102,000. Another is to make technical adjustments in the Consumer Price Index to reflect the widely, though not universally, shared view that the index overstates inflation. Since Social Security recipients get cost-of-living increases based on the index, a change in the CPI could reduce the cost of the program.

Other proposals have centered on using the stock market to increase returns, either by having the government invest part of the Social Security fund or allowing individuals to do so in private investment accounts. President Bush tried -- but failed -- to do just that. His proposal would have partially privatized Social Security by allowing Americans to invest small portions of their Social Security taxes in the market (in most plans, about 2 percentage points of the 12.4 percent tax), with the remainder going into the existing system.

Proponents, including President Bush, argued this would allow people to take advantage of the greater long-term returns possible in the stock market - but of course, participants would run the risk of losing money if they make bad investments. Critics, including former Federal Reserve Chairman Alan Greenspan, argue that Social Security's investments in the stock market would be vulnerable to political influence and would give the government too much control over the economy. A private account plan would also cost a lot of money up front, because the money shifted into private accounts wouldn't be available to pay current benefits, so the government would have to make up the difference.

Some experts would take privatization even further, by scrapping Social Security in favor of mandatory retirement savings accounts on a model pioneered by Chile and since adopted in various forms by Australia and the United Kingdom. Workers would be required to put their money into the accounts, just as they are required to pay Social Security taxes, but would decide how their contributions would be invested. The government would guarantee a certain minimum pension to everyone, but some retirees would benefit more than others.

The Public's View

Surveys find the public is not inclined to confront the painful possibility that benefits may need to be scaled down, or taxes raised, to sustain Social Security. Most Americans are convinced that if Social Security were run more efficiently, the program could be sustained without hard choices.

But most Americans do recognize the seriousness of the problem. Polls show that the public is not confident the Social Security system will continue to provide benefits of equal value to those received by retirees today, with younger and lower-income Americans much more worried about the program than senior citizens.

Only about 3 percent of Americans, however, rank Social Security reform as among the most important issues facing our nation, lagging far behind the war in Iraq, the economy, health care and immigration. Even though most Americans acknowledge the looming problem, most still haven't acted aggressively to save for themselves. The personal savings rate has plummeted over the past decade -- and, in fact, in recent years Americans have been spending more than they saved, the first time that's happened since the Great Depression.

But what changes are acceptable? Although a solid majority of Americans agrees that Social Security will go bankrupt if costs aren't reduced soon, most oppose cost-cutting options such as increasing the retirement age, raising payroll taxes unless or cutting benefits. One of the few measures that elicits majority support would be to reduce Social Security benefits for high-income families. Higher income and highly educated people are more likely to favor plans to invest Social Security funds in stocks.

But surveys show that public support for investing Social Security funds in the stock market or letting people invest their own Social Security taxes can vary widely depending on how the question is worded. Public support falls off when poll questions that raise the issue of investment risk, for example. This is usually a sign that the public hasn't learned enough about an issue or thought through all the implications.

Choicework

For more detail on how society could address this issue, visit our Discussion Guide which sets out four alternative approaches.
The points of view are drawn both from what the experts say about an issue and from what the public thinks about it, based on surveys and focus groups. We call this section "Choicework." Each point of view comes with the arguments for and against, along with some potential costs and tradeoffs - because every plan has both pros and cons, and a citizen should face both honestly.

• One perspective argues that Social Security is a promise made by the government to all Americans, and must be maintained intact. Only minor changes are required to save the system, in this view.

• Another perspective says that promise must be adapted to new realities, and argues that it makes no sense to jeopardize other public priorities to shore up Social Security. The program can only be saved by trimming benefits and requiring Americans to work longer before retiring.
• A third view says we can avoid benefit cuts and other unpleasant choices by permitting the government to invest Social Security funds in the stock market to gain a higher rate of return.
• Individuals should take responsibility for their own financial security, according to a fourth perspective, which argues that Social Security should be replaced with mandatory savings accounts controlled by individuals.