Social Security Reform Poses Problems for States

By Snell, Ron; Madrid, Gerri | State Legislatures, January 2000 | Go to article overview

Social Security Reform Poses Problems for States


Snell, Ron, Madrid, Gerri, State Legislatures


Constituents, budgets, government employees...those are just a few of the reasons lawmakers need to keep an eye on what the feds are up to with Social Security.

Social Security is in trouble, and that's reason for legislators to worry--to worry sevenfold, in fact. The system is in trouble partly because of demographics and partly because benefits are paid from current revenues, instead of from accumulated savings as state pension benefits are.

The demographics have become familiar. The American population is aging. At present about 13 percent of all Americans are over 65, but a low birth rate means that by 2030, over 20 percent of the population will be over 65--48 million people in all. And those people will be living longer. Inevitably a smaller proportion of the population will be of working age--from 20 to 65. The average number of workers per beneficiary will fall from more than three in 1999 to two by 2030.

"We've got to tackle Social Security now while workers still outnumber beneficiaries," says Indiana Senator Larry Borst, "otherwise the program faces insolvency."

The Social Security system is not financially prepared for this demographic change. It is basically a pay-as-you-go system, designed to pay benefits out of current revenues. Social Security is currently collecting more taxes than it is paying in benefits and is accumulating a surplus. But the surplus will never be enough to cover future obligations. Current estimates: The system will begin to pay out more than it takes in by 2014; all accumulated principal and interest will be gone by 2034; after that, at current payroll tax rates, the system will be able to pay only 71 percent of its promised benefits. The urgent need for Social Security solvency is obvious.

Proposals to solve the problem range from privatizing the whole thing and getting the federal government out of the income-security business to cutting benefits and raising taxes so the current plan can survive.

But first, why should state legislators worry about this? Isn't Social Security a federal obligation? Why can't legislators focus on issues closer to home?

SEVEN REASONS TO WORRY

Following a yearlong study of Social Security and its looming insolvency, the 25 legislator and legislative staff members of the NCSL Executive Committee Task Force on Social Security Reform found at least seven reasons why legislators need to be informed and even worried about the future of Social Security.

1. Most of your constituents are either paying Social Security taxes or receiving benefits.

Of the 273 million people in the United States in August 1999, 146 million (53 percent) were paying into the Social Security system (along with employers) and 44 million (15 percent) were collecting benefits. That's 190 million participants, nearly 70 percent of the people in this country. Some of them live in your district. And they probably have concerns about whether the benefits they have been paying for will someday arrive or whether the benefits they are collecting will keep on coming.

Social Security has the potential for being very divisive in the future. "Intergenerational equity" is a phrase that has been tossed around in recent years in this context.

"Younger workers sandwiched between the baby boomers and Gen X are particularly concerned that their benefits won't be there for them in retirement. At the same time, they worry that reductions to benefits in the near future will require them to contribute additional resources to the retirement of their parents," says Connecticut Representative Brian Flaherty.

If Social Security benefits continue to be paid from current payroll tax collections and benefit 1evels remain the same, payroll taxes will have to increase sharply in the future. Future workers will receive smaller benefits in proportion to payroll taxes.

"These concerns create conflict among generations of workers and beneficiaries that may grow more hostile as the demographics of Social Security continue to shift," Flaherty says. …

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