The Great Social Security Debate

Abstract

Social security is the largest US federal program and the most enduring legacy of the New Deal. The program has more than 50 million beneficiaries and generates expenditures (US$585 billion in 2007) that are significantly higher than the defence budget.1 Known as the third rail of American politics (touch it and die), social security is a popular program, which means that few politicians explicitly seek to dismantle it. Yet, because of the demographic challenge ahead, some changes are necessary to fix the anticipated long-term fiscal imbalance in social security. The current debate on social security is about the nature of the changes necessary to solve the long-term fiscal challenge stemming from demographic aging. This brief article explores the debate on the future of social security, with a focus on the Bush years (2001-09) and the ideas put forward by Barack Obama during the 2008 presidential campaign.THE DEVELOPMENT OF SOCIAL SECURITYThe modern pension system in the United States took shape during the New Deal and the post-World War II era. This system is divided into four main parts: federal old-age, survivors, and disability insurance - a centralized earnings-related scheme that covers more than 95 percent of the workforce; supplemental security income - a means-tested federal assistance program offering modest benefits to poor, disabled, and elderly citizens; voluntary, tax-subsidized private pension plans (defined-benefit and definedcontribution schemes included); and personal savings and tax-subsidized individual retirement accounts.Adopted in 1935 as a key element of the social security act, old-age, survivor, and disability insurance is widely known as social security. Now the largest social program in the United States, social security expanded in the postwar era, especially during the Nixon presidency (1969-74). In the mid1970s, the economic downturn triggered by the first oil crisis and the overly generous indexation system implemented in 1974 created the first major fiscal crisis in social security. As a response, the Carter administration sponsored the enactment of the 1977 amendments to the social security act, which raised the payroll tax and changed the indexation formula in order to reduce the anticipated benefits of future retirees. Because the 1977 amendments failed to truly solve the fiscal crisis, in 1983 congress adopted a set of seemingly technical changes aimed at solving the new fiscal crisis in social security. During the legislative process, a rise in the retirement age from 65 to 67 taking place incrementally between the years 2000 and 2022 was added to the bill, inspired by the report of a bipartisan commission on social security that President Reagan had created two years earlier. Overall, the 1983 legislation preserved the basic characteristics of the program, which remained a defined-benefit scheme.2During the 1990s, actuarial previsions became more favourable as economic growth boosted the trust fund's reserves. According to the current actuarial projections, this trust fund should accumulate surpluses until the early 2010s. In the long run, however, population aging and the retirement of baby boomers would further increase the percentage of elderly people in the US. Compared with only 4.1 percent in 1900, this percentage should increase from 12.4 to 20 between 2000 and 2030.3 In such a context, expenditures should exceed revenues, thus eroding social security reserves. According to the 2008 trustees' report, the fund would face fiscal shortfalls in 2042.4 Although liberal policy experts argue that relatively technical changes could solve this long-term fiscal challenge, many conservatives have called for a major transformation of social security.5 Although there is no evidence that such a project would help address the long-term fiscal imbalance in the program, demographic fears concerning its future are central to the campaign in favour of social security privatization. …