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TIMES BOARD OF ECONOMISTS

Guard the Social Security Surplus

January 27, 1987|Michael J. Boskin | Michael J. Boskin is professor of economics at Stanford

Social Security is the federal government's most important and popular domestic program. More than 100 million Americans pay Social Security taxes, and close to 40 million receive Social Security benefits.

The federal government also takes in more revenue in Social Security taxes than it does in personal income taxes from most Americans, and it spends more on Social Security and Medicare than on defense. Thus, Social Security affects every American family both directly and indirectly through the impact the vast system has on our economy.

Unfortunately, Social Security's future is threatened by short-term and long-term financial problems, and its current payment practices are riddled with serious inequities.

Although Social Security has sharply reduced poverty among the elderly, the huge sums it transfers between generations and families do not always go from the rich to the poor. In addition, Social Security provides a better deal for one-earner couples than for two-earner couples and for older workers than for younger workers. For example, a couple who were born in 1945 and who both earn $25,000 annually would, according to current projections, pay $124,000 more in taxes than they can expect to receive in benefits, taking into account inflation and the time value of money. Future attempts to reform Social Security are sure to address these sorts of imbalances.

Much more worrisome, however, are Social Security's projected actuarial deficits. To be sure, no current recipient of Social Security benefits who depends heavily on this aid has any reason to be concerned. But in the long run, the hospital insurance portion of Social Security is expected to develop immense shortfalls. We would have to increase Social Security taxes by more than 20% tomorrow to keep this part of the Social Security budget in balance over the next 75 years.

Largely for political reasons, serious financing problems also could surface over the long run with the retirement and disability portions of Social Security, even though those areas are expected to produce big surpluses in the near future. Here's why: By around the year 2015, the surplus for those areas is expected to amount to close to 30% of the nation's gross national product, almost as big as the present ratio of national debt to GNP. This surplus is necessary to prevent economically and politically disruptive tax increases when the baby boom generation retires.

Can't Maintain Surpluses

The trouble is, the federal government never has been able to maintain such surpluses. Indeed, the surpluses are scheduled to be five times bigger, relative to GNP, than any Social Security surplus before. When the previous peak surplus occurred in 1954, the government responded by launching disability insurance.

This time, as well, there is likely to be pressure to use the surplus to expand Social Security benefits. Or there could be a push to subsidize the hospital insurance program and support other forms of government spending. If those temporary surpluses are diverted to other uses, however, the eventual results will be disastrous. Squandering the surplus would completedly destabilize the long-term balance of Social Security finances. In terms of today's dollars, Social Security will spend $10 trillion over the next 75 years. But if the surpluses in retirement and disability are used to raise benefits, that figure could rise to $13 trillion, an increase that could lead to both enormous tax increases and benefits cutbacks early in the next century.

Moreover, the Social Security system will be strained in coming years by the aging of the baby boom generation and the increasing life expectancy of the elderly. The fraction of the population over the age of 65 is projected to double by 2030, and the share over the age of 85 is expected to triple. The ratio of people 65 and older to those from age 18 to 64 will double as well.

Elderly More Affluent

In the past, economic growth and poverty among the elderly triggered increases in Social Security benefits. The rate of productivity growth, however, has been cut in half since the late 1960s. Over the same time, the relative income of the elderly has increased enormously--the per-capita income of the elderly, in fact, exceeds that of the general population. Consequently, it is imperative that the Social Security surpluses neither be squandered by increasing benefits unnecessarily to those who no longer need them nor be used to increase other kinds of government spending.

Issues such as Social Security are complex and difficult to deal with in a political arena that focuses on the very short term, usually the time until the next election. But we have reason for some cautious optimism. In 1983, Congress approved gradually phasing in higher retirement ages for those receiving benefits, despite the lack of immediate pressure to do so. The 1983 amendments were intended to put Social Security on a stable course, leaving behind the pay-as-you-go financing that eventually would have required huge tax increases. We will need a substantially greater supply of such wisdom in the years ahead if Social Security is to remain secure.

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