“Saving” Social Security Is Not
The corridors of Washington are ringing with calls to “save” Social Security. And it is certainly easy to understand why the program needs “saving.” Social Security is rapidly heading for financial insolvency. By 2018 the program will begin running a deficit, paying out more in benefits than it takes in through taxes. The resulting shortfall will necessitate at least a 50 percent increase in payroll taxes, a near one-third reduction in benefits, or some combination of benefit cuts and tax increases. Overall, Social Security faces a long-term funding shortfall of more than $25 trillion. 1
As a result, there have been numerous proposals designed to shore up the program's shaky finances. Those proposals generally take one of two tracks: setting aside current Social Security surpluses in some form of “lock box” or injecting general revenue financing into the system.
There are serious flaws in both of those approaches. The lock-box proposals do not, in fact, do anything to change Social Security's financing. Currently, surplus Social Security taxes are used to purchase government bonds, which are held by the Social Security trust fund. Those bonds will eventually have to be repaid. To do so, the government will have to raise revenue. Thus the bonds represent nothing more than a claim against future tax revenues, in essence a form of IOU. 2 Revenue from the purchase of those bonds is credited to the unified federal budget and used to pay the general operating expenses of the federal government. Under lock-box proposals, the revenue from the purchase of the bonds could be used only to pay down the national debt. Paying down the national debt may or may not be a good thing, and it may make it easier for the federal
Originally published as Cato Institute Social Security Paper no. 20, May 25, 2000, and updated to reflect current information.