Social Security: Long-Term Financing and Reform

Abstract

The Social Security program was intended to be modeled along the lines of a private insurance plan. Yet, it was never that similar, and changes over the years have made it even less so.This paper explores the factors contributing to the periodic crises in Social Security, considers the program's long-term financial prospects, and critiques privatization reform proposals. I describe changes in the calculation of contributions and benefits, changing economic and demographic factors, the system's method of financial accounting, and, most important, the nature of the assumptions underlying the trustees' reports. Indeed, the reason for the current looming crisis is not demographics but the pessimistic assumptions used in the reports of the 1980s and 1990s.I also question the wisdom of the fund approach—where reserves are amassed, earn interest, and can be depleted in the future—given that US government revenues are not market-determined and can be supplemented at any time. The essential issue is whether the economy will continue to produce sufficient quantities of goods and services to provide for both workers and retirees in future years.