May 7, 1999

Social Security Today and Tomorrow

In a nut shell, Social Security is an insurance program that was designed to guard against the risk of poverty caused by loss of income because of retirement or disability. It is a self-financing program that is paid for with earmarked payroll taxes. Since no money is set aside for the future, Social Security is not a savings plan. It is a pay-as-you-go system in which today's workers pay for today's retirees. When the system was enacted in 1935, it was envisioned that Social Security would be part of a three-legged stool of personal savings, employer-provided pensions, and a Social Security safety net. However, today, Social Security is the largest source of income for middle- and low-income retirees.

In one sense, Social Security has been successful. It has helped reduce the number of seniors living in poverty from about 35% of the elderly population in 1959 to about 10% in 1997. However, as the Social Security system matures, a number of problems have become increasingly apparent. While the government system was designed to be one of three legs of retirement income, these benefits make up a large majority of income for many middle- and low-income seniors. Past efforts to keep the Social Security system solvent have resulted in some seniors not receiving a fair return on their lifelong contribution to the system. Finally, a pay-as-you-go financing system as used by Social Security usually provides a worse deal as the system matures. While on the whole older generations have done very well under Social Security, younger and future generations will do much worse. Today's retirees will continue to receive full benefits under the current system, but it is projected that Social Security will start paying out more than it takes in around the year 2013 - when the ‘baby boomer' generation begins retiring. By 2032, annual income to Social Security will cover only about 72% of promised monthly benefits.

Preserving Social Security for the future is one of the most challenging and important tasks we will undertake as a nation. Fortunately, steps can be taken today to protect Social Security for current and future retirees. If no changes are made to the current Social Security system, reform options include raising the payroll tax rate, increasing the taxation of benefits, increasing the payroll tax base, raising the retirement age, reducing cost-of-living adjustments or adjusting the benefit formula. I think most of us will agree that none of these options are particularly appealing.

To avoid having to resort to the kinds of reforms that sacrifice the basic Social Security principle of individual equity and place a disproportionate burden on young and future workers, it seems that changes to the underlying financing structure of the system may need to be made. Recently in Congress, Social Security reform plans have been introduced that would change the system from pay-as-you-go to pre-funded. The intent is to set aside money today to pay for benefits tomorrow. These proposals need to be carefully considered. I believe that any reform of Social Security should adhere to five basic principles: (1) lock away the Social Security surplus so that it is not spent on other government programs, (2) preserve the guaranteed safety net, (3) ensure fairness for all generations, (4) eliminate work penalties on seniors, and (5) improve the rate of return for younger workers.

Because Social Security is of importance to Americans young and old, we all should take an active role in preserving the system. As Congress continues to engage in the Social Security reform debate, I encourage all Southern Missourians to share their views on the future of the system with me.* In the next few weeks, I will be posting information on Social Security reform proposals and a survey on my internet home page. If you do not have access to the internet, I will be happy to send information upon request.

*Mail comments to 132 Cannon House Office Building, Washington, DC 20515; e-mail at joann.emerson@mail.house.gov. The home page address is www.house.gov/emerson/.