The Impact of Social Security Reform
on Low-Income Workers
It is now generally acknowledged that Social Security is facing a large financial shortfall. Under the Social Security Administration's intermediate economic and demographic assumptions, the system's annual outlays (benefits plus administrative costs) will begin exceeding tax revenues after 2018. Official projections indicate that meeting future Social Security funding shortfalls by issuing debt would require additional debt accumulation of $47 trillion by 2075. 1
Such a large financial imbalance makes changes in Social Security inevitable. However, it is important to realize that any change will have a significant impact on the lives of millions of Americans. That is especially true for low-income Americans, who disproportionately depend on Social Security for their retirement income. The poorest 20 percent of the elderly, for example, depend on Social Security for 78 percent of their retirement income, while Social Security provides only 24 percent of retirement income for the wealthiest fifth of retirees. 2
There are relatively few options for restoring Social Security to solvency: we can, of course, increase taxes or cut benefits, but these would have to be quite severe. In 2001, the President's Commission to Strengthen Social Security estimated that it would take benefit reductions of 26 percent or tax increases of 37 percent to keep the program in actuarial balance over the next 75 years. 3 Either of these alternatives would have a devastating effect on the economy. Even if we were able to impose such drastic policies, they would result in a considerable increase in tax distortions and economic inefficiency.
It would therefore be desirable to alter our system of retirement security by making benefits more attractive than they are at present
Originally published as Cato Institute Social Security Paper no. 23, December 6, 2001, and updated to reflect current information.