Social Security still in trouble

A new report by Congress' official budget shop, the Congressional Budget Office, sent the Social Security universe into a tizzy. The CBO report says Social Security's long-term debt is slightly smaller than the $10.4 trillion price tag estimated by Social Security's trustees back in March.

Critics of President Bush's proposal to strengthen Social Security with personal retirement accounts immediately seized the new report as evidence that when it comes to Social Security – to borrow a line from Mark Twain – reports of its imminent death are greatly exaggerated.

"The CBO report shows just how tentative estimates about the problems of Social Security are, and how absurd it would be for policy-makers to dramatically alter the program based on those numbers," said Barbara Kennelly, president of the National Committee to Preserve Social Security and Medicare.

"The CBO's findings reinforce previous indicators that Social Security is continuing a decade-long trend of stability and even improvement in the long-range health of the system," said Rep. Bob Matsui of California , ranking Democrat on the House Ways and Means Committee.

Perhaps Ms. Kennelly and Mr. Matsui are reading a different CBO report than I am. The version I saw says Social Security's finances run short in 2019 – only 15 years away. From that point on, all the money the Social Security Trust Fund has been loaning to the federal budget over the years will have to be paid back. "In effect," says the CBO report, "cash will be transferred from the government's general fund to Social Security," either through higher taxes, lower spending on other programs or higher debt.

Between 2019 and 2052, when the CBO report says the Social Security Trust Fund will run dry, the government will have already transferred several trillion dollars from the general fund. It will be like the trust fund never existed. Thus, it doesn't matter if the trust fund is exhausted in 2042 – as the Social Security trustees suggest – or 2052, as the CBO report projects.

Basically, CBO's numbers are slightly different than the Social Security trustees because of different assumptions about wage growth, inflation and other assumptions, but in the end, whether Social Security is promising $10.4 trillion, like the Social Security trustees suggest, or 20 percent less, as the CBO report projects, the effect on the federal budget will be significant.

And that's just for Social Security. Add Medicare, which is also partially paid for from the payroll tax, and the problem is much worse and much more immediate. The two programs combined will consume all $789 billion they are expecting to collect in payroll taxes this year, but they will still need an additional $45 billion from general income tax revenues to pay fully promised benefits.

In all, to pay Social Security and Medicare benefits from now on, we need $72 trillion in the bank today, earning interest. Needless to say, we don't have it. Thus, each generation will have to hand over more and more money.

Regardless of which report you believe, Social Security and Medicare face tough times ahead. America is aging. When Social Security began, there were 42 workers paying into Social Security for each retiree collecting benefits. By the time Medicare was put into effect in the 1960s, the ratio had fallen to 16-to-1. Today, the ratio is 3-to-1. Between now and mid-century, after retirement of the 77 million Baby Boomers, the ratio will decline to 2-to-1.

This is important because Social Security and Medicare aren't savings programs. Instead, they pay benefits to today's retirees using contributions collected from today's workers. When we current workers retire, our benefits will be paid by our children and grandchildren, and so on.

That's why so many economists suggest strengthening Social Security with the inclusion of personal retirement accounts. Under such a reformed program, Social Security's burden on future taxpayers would be dramatically reduced because each worker would save part of his or her own Social Security benefits.

Further, a reformed Social Security program will not become a vacuum, sucking resources from other important priorities, such as roads, schools and our nation's defense. At the same time, personal accounts will stimulate investment and economic growth and free up resources needed to fix Medicare – which is in much worse shape than Social Security.

Matt Moore is a senior policy analyst with the National Center for Policy Analysis, a public policy research institute.