A Banking View of Social Security's Financial Problem

By Strand, Rob | ABA Banking Journal, April 2005 | Go to article overview

A Banking View of Social Security's Financial Problem


Strand, Rob, ABA Banking Journal


The rhetoric in Washington has grown in intensity ever since the President's Inaugural Address firmly established Social Security reform as the "top domestic priority" for his administration. Playbooks have emerged on both sides of the aisle, full-page ads for and against reform have appeared in newspapers, and every think-tank in Washington has held a program to debate the issue.

While there are many aspects of reform, there are two main areas of debate: 1. how to finance the unfunded liability (the difference between the promised benefits over time and the expected revenues), and 2. carving out a portion of Social Security taxes and benefits for new Personal Savings Accounts. While these are separable issues, the two are often interwoven in the debate.

Unfunded liability

According to the Social Security Administration, starting in 2018 projected benefits paid to retirees will exceed projected payroll tax revenues, and the forecast says that shortfalls will continue to grow thereafter. The Social Security trust fund can cover the difference by gradually liquidating its portfolio of Treasury bonds, which have accumulated through past years when revenues exceeded payouts. In 2042, the trust fund will run out of Treasury securities. The excess of promised benefits over revenue after 2042 is the unfunded liability--a $3.7 trillion gap over 75 years. The current system and any reform plan must address this liability.

While the exact years when these events will occur can be disputed, their existence cannot. With life spans rising and birthrates declining, the ratio of workers who pay Social Security taxes to retirees who receive benefits keeps on declining. (See Chart 1.) It seems inevitable that sometime around 2018 workers will pay into the system less than beneficiaries draw out, and the trust fund will eventually run out of money--unless something is done about it.

[GRAPHIC OMITTED]

Funding the unfunded liability must come from some combination of additional borrowing, raising taxes, reducing other government spending, and reducing Social Security benefits. Under current law, when the Social Security trust fund runs dry, benefits will automatically be reduced to a level equal to incoming revenue. The benefit reduction is projected to start at 27% in 2042 and continue to rise.

Personal Savings Accounts

President Bush has promoted the concept of Personal Savings Accounts (PSAs), which would allow individuals to invest a portion of their contributions to Social Security in stock and/or bonds. PSAs are tied to the President's "commitment to an Ownership Society" and represent a fundamental change in government's role in providing for retirement benefits.

The most common approach under discussion is to "carve out" a portion of what is paid in Social Security payroll taxes to be placed in a "401(k)-like" retirement vehicle directed by the individual. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

A Banking View of Social Security's Financial Problem
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.