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February 28, 2001
Doing Nothing on Social Security Now Will Cost More Later
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A new analysis from the Employment Policy Foundation (EPF) says policymakers must address the Social Security conundrum sooner rather than later to avoid catastrophic economic consequences.
According to the analysis, if nothing is done to shore up the nation's retirement system before it becomes insolvent in 2037, payroll taxes, which are shared between employer and employee, will have to be raised from today's level of 12.4 percent on the first $80,400 of income to 17.4 percent on the first $115,000 on income to keep the system afloat.
The long-run tax bill would total $39.8 trillion in real 2000 dollars if nothing is done prior to 2037. On the other hand, a more modest payroll tax hike to 15.1 percent effective immediately, according to EPF's analysis, could cut the total cost of keeping the system solvent almost in half, short of any other policy changes.
Or, if no action is taken to change the system before 2037, benefits will have to be cut 27 percent in 2037 and 37 percent in 2101. A 17.5 percent flat cut in benefits now, without any other policy changes, would ensure long-term solvency, the analysis reports.
Another way to shore up the system involves fundamental reform, such as the creation of private accounts to allow for a higher rate of return on investment, a concept President Bush has endorsed and one that President Clinton also outlined in his 1999 State of the Union address.
Achieving a consistent annual rate of return of 9.5 percent on Social Security trust funds or equivalent private savings (compared to the current 7.2 percent return on federal government securities that the system currently generates) would ensure the system's financial stability long into the future.
"It seems clear that political inertia must be overcome in order to solve the Social Security crisis," said EPF President Ed Potter. "There is no question that there are solutions we can either raise taxes now, raise taxes later, cut benefits or reform the system."
Click here to read the complete report (PDF).
2-28-01