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Revamping Social Security

"They deliberately raised the Social Security tax, an extremely regressive tax, to supposedly pre-fund Social Security," Baker said. "If Congress had said that money would be used to fund the government, then cut from Social Security when the time came to redeem those bonds, they would have been run out of town."

"Morally, this has to be seen as a burden that falls on the general government," Baker concluded.

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Social Security

Friday's Question:

"But," Blahous responded, "it's not much consolation to the worker of 2025 that there was an understanding in 1983 that he foot the bill."

Resolving whether and how to fund the debt owed to Social Security is critical. If the system is allowed to redeem all of its IOUs, it would remain healthy for decades to come. The trustees currently put the date of trust fund "exhaustion" at 2042.

But that date has proven extremely sensitive to economic conditions. In 1994, the Social Security trustees projected the system would run out of IOUs to redeem in 2029, 35 years into the future. But economic growth steadily pushed that date further out. By 2000, the date of exhaustion was 2037. By 2003, it was 2042.

And it could be even further than that. The Congressional Budget Office this summer projected the date of exhaustion to be 2052, a 10-year difference stemming from very small changes in economic assumptions. Many economists -- conservative and liberal -- say the economic future is considerably brighter still.

The trustees assume annual economic growth will slow to a crawl by 2015, and will remain at an anemic 1.8 percent through 2080. That is about half the growth rate the United States has averaged since the Civil War, said James Glassman, senior U.S. economist at J.P. Morgan Chase, who sees no reason why that would happen.

"There still are problems, but it's not the fiscal doomsday that people imagine," said Glassman, who delivered that sanguine outlook at a White House economic conference earlier this month.

Marc Summerlin, a former Bush White House economist, noted that under the current Social Security system, faster economic growth can delay the date of reckoning, but it cannot save the system. Initial Social Security benefits are set by taking workers' average salaries, then raising them by the rate of annual wage growth over their lifetimes. Faster economic growth may push back the day of reckoning, but it raises the size of benefits owed once the date is reached.

But growth does help. Once workers begin drawing Social Security benefits, those benefits rise annually with inflation. If the economy grows faster than the inflation rate, more taxes will flow in to support beneficiaries.

If benefits could be completely unlinked from economic growth -- for example, by setting initial benefit levels according to some combination of wage and price growth -- faster economic performance could go a long way toward saving the system with no other changes to the benefit structure, Orszag said.

Given all these uncertainties, it would be foolish to commit now to dramatic structural changes that may prove unnecessary, Baker argued. After all, lawmakers design and redesign the tax code, knowing full well that future Congresses will undue their work. The Medicare system, which faces far greater financial pressure than Social Security, was bulked up last year with a prescription drug benefit, with the understanding that lawmakers in the future would have to revisit the program. Why then, he asked, does the White House insist Congress in 2005 fix Social Security in perpetuity?

Blahous said such a question only underscores the problems of past congressional efforts.

"In the past, Social Security has been subject to a lot of temporary fixes, and if you make a fix that you know is temporary, by definition you are leaving a gap that some future generation is going to have to step forward to fill," he said. "We have to hold ourselves to a higher standard than a temporary fix this time."

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