For more than 70 years, Social Security has played a key role in personal retirement plans.
Now, however, the repetition of falsehoods — "Social Security is broke … the trust fund money was stolen … we've got to cut the program in order to save it" — have led many to fear that Social Security will not be available when it is their time to retire. These assertions reflect fundamental misunderstandings of a system working just as planned.
The loan fund
In 1983, President Ronald Reagan appointed a commission to "fix" Social Security. It was well known that the oldest baby boomers would be eligible to retire in 2012 with full retirement benefits, and that by about 2018 the payroll tax revenue could not keep up scheduled Social Security payments. More money would be needed to supplement the payroll tax.
Beginning in 1985, the payroll tax was increased to create a surplus. The surplus was loaned to the Treasury in return for safe Treasury bonds, which were then placed in the "Social Security Trust Fund." When the payroll tax revenue becomes insufficient, the bonds can be redeemed — cashed in by Social Security — and the total of payroll tax revenue plus cash from bond redemptions used to meet scheduled benefits.
Now that the boomer retirement is nearly upon us, many critics claim that the system is broken or that the trust fund is a myth. To advocate such a position is to support a classic bait and switch — allowing payments into a bond fund by payroll taxpayers and then permitting the renunciation of the debt those bonds represent.
What's the problem?
There is no problem with the mechanics of Social Security; the problem is that we have squandered some of the resources that would have helped us make the payments. The plan was for the government to use this excess revenue to enhance economic growth through investment in infrastructure and paying down the debt. By enabling the country to increase its productive capacity, the money from the loan fund became the vehicle by which baby boomers would grow the economy for the younger generation that must, in turn, support them in their retirement.
We blew the chance; we fell for the slogan that the surpluses were "our money" to be returned to some of us through tax cuts. The nation, boomers included, ignored the looming retirement bulge and disregarded the carefully designed financial plan to meet it head on. Because the surpluses were squandered on tax cuts and wars instead of growth and debt reduction, the repayment of those loans was endangered.
What to do now
While there is no problem with the financial mechanics of the Social Security system, there are two reasons to slow Social Security retirement benefits to the boomers. First, the miracle of longer life means that the fulfillment of the loan repayment must be stretched over a longer time. Second, the Social Security beneficiaries are part of the same nation that squandered the money and ran up the debt instead of reducing it, and so a means must be found for them to be part of the solution.
Since economic growth was a bit slower than predicted in the mid 1980s, and life expectancy a bit higher, the bonds will run out sooner than planned, that is, in 2037 instead of 2060. For both of these reasons, the growth of benefits can be slowed and still fulfill the promise to the retirees. As the Bowles-Simpson commission has shown, there is no breakdown in the system, and a small adjustment implemented over 50 years resolves what little problem remains.
Charles O. Kroncke is associate dean in the University of South Florida College of Business. William L. Holahan chairs the department of economics at the University of Wisconsin-Milwaukee.