Social Security's Problem

Like a Roman Legion advancing against its enemy, Social Security's future problems approach slowly, but their arrival is inevitable. Rome's legions lined up behind a wall of shields that moved slowly across battlefields with a discipline that few others possessed. Enemies did not know the exact moment when the legions would reach them, and the slaughter would begin, but once the process started, its outcome was seldom in doubt.

Social Security's future problems are equally predictable, even if their exact timing is uncertain. As millions of baby boomers approach retirement, the program's annual cash surplus will shrink and then disappear. Then, Social Security will not be able to pay full benefits from its payroll and other tax revenues. It will need to consume ever-growing amounts of general revenue dollars to meet its obligations--money that now pays for everything from environmental programs to highway construction to defense. Eventually, either benefits will have to be slashed or the rest of the government will have to shrink to accommodate Social Security.

The exact timing of this crunch is less important than its inevitability. Whether Social Security begins to spend more on paying benefits than it receives in taxes in 2017 or 2018 or any other specific year means much less than what these deficits will mean to our economy. Our children may be faced with the choice of paying retirement benefits to their parents or paying for programs that help their own children. That future is coming, and no amount of wishful thinking will change that.

The reason that Social Security's deficits are inevitable is fairly simple. Demographics are more predictable than most events. Millions of baby boomers will begin to retire in 2008, when those born in 1946 reach Social Security's early retirement age of 62. From then until 2025, every year will see another crop of baby boomers reach the 62 year-old threshold. Because the baby boomers have not produced enough children to replace themselves, the number of taxpaying workers will shrink.

Demographic trends do not change rapidly. It takes about 25 years to grow a new taxpayer. We can estimate with surprising accuracy how many people born in a particular year will live to reach retirement. The retirees of 2070 were all born in 2003, and we can see and count them today.

This is critical, because a retiree's Social Security benefits are actually paid from the taxes of those who are still working. The program's finances are based on the relationship between the number of workers paying taxes and the number of retirees receiving benefits.

Back in 1950, as the baby boom was just getting started, each retiree's benefit was divided among 16 workers. Taxes could be kept low. Today, that number has dropped to 3.3 workers per retiree, and by 2025, it will reach--and remain at--about two workers per retiree. Each married couple will have to pay, in addition to their own family's expenses, Social Security retirement benefits for one retiree. In order to pay promised benefits, either taxes of some kind must rise or other government services must be cut.

This future is coming with steady speed. Social Security's annual cash surpluses will begin to fall in 2008, the same year that the first baby boomers reach early retirement age. Over roughly the next 10 years, those Social Security surpluses, about $100 billion a year at their peak, will continue to shrink and then disappear completely. Without those surpluses to reduce the size of the federal deficit, Congress will have to raise taxes to bring in billions of dollars of new revenues, cut programs, or let annual deficits climb.

And then the real problems hit. Somewhere around 2017, on top of replacing Social Security's $100 billion annual surplus, Congress will have to find billions more so that Social Security can pay all of the benefits that it has promised. Within about five years, that additional money will reach $100 billion a year (not counting inflation). From there, the annual demands will reach first $200 billion a year, and soon $300 billion a year.

Then there is Medicare. Together, Social Security and Medicare will consume an estimated 60 percent of income taxes collected by 2040. What's left would have to finance the entire rest of the government.

Without reform, Social Security's future is inevitable, like it or not. We can either prepare now, or dither about what year it will happen. Wishful thinking did not stop the Romans, and it will not prevent Social Security's problems either.