Perspectives from the President’s Commission on Social Security Reform

Social Security faces a severe financial problem. In about 15 years, the program will begin to experience permanent annual cash deficits, when annual benefit payments will exceed the amount collected in payroll tax revenues. By 2041, according to the Social Security Trustees 2002 Report, the Social Security trust fund is projected to be insolvent, meaning that the program will be legally unable to pay scheduled benefits. One way of expressing the financial shortfall is to compute the present value of the difference between system outlays and revenues over a 75-year horizon, which is currently equal to a permanent and immediate tax rate increase of 1.86 percent of payroll, or equivalent to $3.2 trillion in present value. If the policy of pay-as-you-go financing is continued for the next 25 years, a 50 percent payroll tax increase will be required at that time to pay scheduled benefits. Social Security’s bleak financial outlook is not its only significant problem. For current workers, system benefits represent very low returns on payroll tax contributions. The inflation-adjusted return is 1–2 percent for workers earning an average wage, less than 3 percent for low-income retirees and negative for some higher earners and dual-worker couples. Moreover, Social Security fails to provide adequate protection against poverty. For example, one in every four divorced, separated or never-married women over age 65 lived in poverty in 1999. Those in