For almost 70 years, Social Security has provided retirees with a basic level of income that is protected against inflation, financial market fluctuations and the risk of outliving one’s assets. It protects against other risks as well, such as disability or the death of a family wage earner. In addition, through its progressive structure, Social Security provides some protection against one’s career not turning out well. Social Security plays a critical role in providing financial security during retirement: It provides the majority of income for two-thirds of elderly beneficiaries, and all income for 20 percent of elderly beneficiaries.
Over the next 75 years, Social Security costs are projected to rise by about 2.5 percent of Gross Domestic Product (GDP), while revenues are projected to decline slightly as a share of GDP. Social Security’s long-term financial health can be restored through either minor adjustments or major surgery. In our view, major surgery is neither warranted nor desirable—sustainable solvency and improved social insurance can be accomplished by a progressive reform that combines modest benefit reductions and revenue increases (as presented in more detail in Diamond and Orszag, 2004).
We begin by describing some benefit improvements for vulnerable groups for which there appears to be wide support, including from the President’s Commission to Strengthen Social Security (2001) appointed by President Bush. We then discuss our proposed benefit and tax changes to close the underlying Social Security deficit and finance these important social insurance improvements. We also examine plans that replace part of Social Security with individual accounts, explaining why, in our view, such a course would not represent sound policy.