Should We Fund Social Security?

Abstract

The old-age, survivors, and disability insurance program is projected to run unprecedented annual surpluses for the next 30 years, accumulating assets equal to nearly 30% of GNP by the year 2018. Hence, by funding its Social Security program, the United States is currently faced with a unique opportunity to augment its low level of national saving. Whether or not saving actually occurs, however, will depend on how the assets in the Social Security trust funds are used. If the reserves are used to finance current consumption-for example, to pay for current outlays in the rest of the budget-no real saving will occur. On the other hand, if the government alters its spending and taxing patterns to produce surpluses at the federal level, the nation will enjoy higher saving and investment. This article first investigates the likely impact of the projected trust fund activity on aggregate saving an capital formation, assuming that the surpluses in the trust fund represent a net increase in saving. It then explores some practical problems associated with achieving this goal-primarily, the temptation to use the funds for other government expenditures. The author concludes that if the nation is willing to increase its saving rate, then the trust fund is a convenient vehicle for doing so and will provide future generations with higher incomes from which to support retired workers. However, if the nation is unwilling to increase saving, then the pretense of a trust fund accumulation should be dropped and, after an adequate contingency reserve has accumulated, the system returned to an explicit pay-as-you-go basis.