Social Security Reform: An Overview
Triest, Robert K., New England Economic Review
Recent decades have seen a trend toward longer life expectancy and reduced birth rates across the globe. This is good news - the pressures created by rapid population growth are being relaxed, and people are more likely to live to old age - but it creates problems for programs such as Social Security, which are designed to provide for the consumption needs of the elderly. In the United States, the retirement of the baby boom generation will result in a decrease in the number of workers per Social Security beneficiary from 3.3 now to 2.0 in the year 2030. Continued increases in life expectancy and slow growth in the working-age population imply that this ratio is likely to continue to decrease, even as the baby boom generation passes from the scene later in the century.
The decrease in the ratio of workers to beneficiaries will necessitate changes in our Social Security program. Currently, Social Security payroll tax revenue exceeds benefit expenditures, and the trust fund is growing. However, expenditures are expected to exceed tax revenue starting in 2012, and without changes in the program the trust fund is likely to be exhausted in 2029. Some combination of payroll tax increases and benefit cuts, or a more radical restructuring of the program, will be needed to keep Social Security solvent.
The fiscal problems faced by Social Security are just one component of the more general problem faced by society: How do we provide for the consumption needs of an increasingly aged population? In addition to using Social Security benefits to finance their consumption, the elderly rely on private pensions, personal savings, labor earnings, other government transfers, and intra-family transfers. These other transfer mechanisms will also be strained as the population ages. And if Social Security is cut back, either the consumption of the elderly will be reduced (relative to what it would be under current policy) or the difference will have to be made up through the other sources of spending.
Social Security policy decisions made in the next few years will have a large impact on the economic well-being of both future retirees and workers. Aside from the obvious impact of possible changes in the structure of Social Security benefits on the welfare of retirees, Social Security reform may cause changes in national saving, labor markets, and financial markets that affect all members of society. Because of the potential importance of these changes to the economy and to future living standards, the Federal Reserve Bank of Boston devoted its forty-first annual economic conference, convened in June 1996, to Social Security Reform: Links to Saving, Investment, and Growth.
The first paper presented at the conference, by Steven A. Sass and Robert K. Triest, examines the nature of the problems facing Social Security and discusses two particular dimensions of reform: whether Social Security should be moved in the direction of increased pre-funding, and whether it should retain its current defined-benefit structure or adopt a defined-contribution format. Subsequent papers examine how reform would affect specific aspects of the economy. Theresa J. Devine addresses the question of how reform would affect labor markets. Eric M. Engen and William Gale examine the impact on saving. Henning Bohn models the impact of demographic change and Social Security reform on financial markets and risk-bearing. Barry P. Bosworth and Gary Burtless examine the impact of reform in an open economy setting. The conference also included two panels, one on the experience of four other countries and a concluding policy panel, and two addresses, one by Edward D. Berkowitz on the historical origins of Social Security and one by Edward M. Gramlich, chair of the 1994-1996 Advisory Council on Social Security, relating his perspectives on reform.
Not unexpectedly, the conference did not produce a consensus on the "right" way to reform Social Security. …