Social Security Reconsidered

Henry J. Aaron

Social Security is currently much in the news because it faces a projected funding
gap, because of overall budget deficits, and because of doubts in some quarters
about its design. Minor adjustments are sufficient to close the funding gap. Benefit
cuts, even if considered desirable, would not help close the overall budget gap
in a timely way. Some adjustments in Social Security benefits and financing are
desirable, but large scale changes would be disruptive and would not well serve
the program’s basic purposes — to provide assured, basic income to retirees, the
disabled, and survivors — unless they more or less replicated the current program.

Social Security assures people basic income in defined contingencies, providing a
floor to undergird private saving. The program has been remarkably successful in
performing these functions. Of families age 65 or over, 64 percent received half or
more of their income and 22 percent received all of it from Social Security in 2008. In
public opinion polls, Social Security consistently ranks as the most popular government
program. Nonetheless, the size and structure of Social Security now generate intense
public interest for three reasons:

  • The Social Security Trust Funds face a projected long-term funding gap. If the
    trust fund is exhausted and revenues are less than benefits at that time, financial
    rules would require benefit cuts. A financially-driven benefit cut has never happened
    before, but it is projected to occur in 2037 (Board of Trustees, 2010). If
    nothing were done before then and the projections do not prove to be unduly
    pessimistic, it would be necessary in 2037 either to cut benefits by approximately
    24 percent or, to sustain benefits, raise earmarked revenues 32 percent.1 Alternatively,
    action could be taken earlier to raise earmarked taxes, cut promised
    benefits, or boost the investment yield on accumulated Social Security reserves.
  • Independently of the trust fund gap, federal spending is expected to exceed total
    revenues by progressively larger amounts. Eventually, large continued budget
    deficits would threaten the stability of the U.S. economy. Because Social Security
    spending and earmarked revenues are large – accounting for 20 percent of
    federal government spending and 29 percent of federal revenues in 2010 – many
    believe that measures to lower projected Trust Fund gaps could help close future
    budget deficits.2
  • Finally, elected officials and analysts continue to disagree on whether Social Security
    could be structured to better achieve the objectives of social insurance – to
    assure basic income to retirees, the disabled, and dependent survivors of early
    decedents. The disagreements extend to both the design and the size of the program.
    Social Security was designed three-quarters of a century ago for a nation that was
    different in many respects from modern America. Changing circumstances might
    require revisions in the ways people cope with retirement, disability, or the death
    of a bread-winner. In addition, ideological divisions – over the extent to which, if
    at all, the government should use its sovereign authority to impose taxes in order to
    pay for pensions – that date from the creation of the program persist to this day.

I shall take up each of these issues in turn. On the first question, all of the projected
funding gap facing the Social Security Trust Funds – and more – results from the
payment of benefits to people who qualified for benefits early in the life of the program.3 How to service the debt incurred because of payments made to people, most of
whom are dead or retired, goes to the heart of the way the financing of Social Security
is framed in the public mind.

The Social Security actuaries project that Social Security spending, as a share of
GDP, will rise 1.2 percent between 2010-2030, but will then fall by 0.2 percent between
2030-2050 as baby-boomers die and are replaced by smaller age cohorts and because the
share of total compensation subject to tax is projected to continue to fall. The Congressional
Budget Office (CBO) (2009) anticipates that the share of GDP devoted to Social
Security will increase a bit more – 1.8 percent – between 2010-2030 and then fall
back to 1.5 percent of GDP between 2010-2050. In both cases, Social Security accounts
for a negligible share of the total projected increase in federal spending.4

More importantly, if the ratio of debt to GDP is to be stabilized before it reaches levels
widely regarded as dangerous, budget deficits must be reined in long before 2030.
Because Social Security accounts for one fifth of non-interest government spending,
various study commissions have proposed that benefits be cut (National Research
Council and National Academy of Public Administration, 2010; National Commission
on Fiscal Responsibility and Reform, 2010; Bipartisan Policy Center, 2010). For reasons
to be described below, however, cutbacks in Social Security benefits are unlikely to kick
in fast enough to help materially in stabilizing the debt/GDP ratio.

The third question concerns whether a pension program designed in the Great
Depression remains well suited to the 21st century United States. My conclusion is that
wholesale change is undesirable but that various adjustments should be made. Indeed,
increases in various risks that people commonly face have heightened the importance of
the assured basic income that Social Security provides. It is certainly possible through
the exercise of enormous ingenuity to conceive of alternative arrangements that would
reproduce many of the benefits generated by Social Security. The transition to such
arrangements would be laborious and costly. In the end, such a shift would produce few
if any demonstrable benefits. In particular, current proposals to replace some or all of
the current Social Security system with individually owned private accounts have not
been shown to advance any legitimate national objective. Specifically, private accounts
are neither necessary for, nor sufficient to, promote increased pension saving.


1. In practice, benefit payments are delayed rather than cut.
2. Officially, Social Security spending and revenues are “off-budget,” along with operations of the Postal
Service. In practice, all reports of budget balance merge these off-budget accounts with so-called “onbudget”
government operations.
3. Perhaps the most dramatic example is that of the first Social Security beneficiary, who paid $49.50 in payroll
tax (including her employer’s tax payment) and received benefits totaling $22,888.92. See “Research Note
#3: Details of Ida May Fuller’s Payroll Tax Contributions.” Social Security Online,
4. Technically, Social Security should not be included in future projected deficits after 2037 because law prohibits
benefit payments from exceeding current earmarked revenues after Trust Fund balances have been
exhausted. However, the Gramm-Rudman-Hollings legislation enacted in 1985 instructs the CBO to ignore
this requirement. Consequently, CBO projects Social Security spending exceeding earmarked revenues, so
that its long-term budget projections show deficits that are larger than actually authorized under current law.