The Effects of Social Security Reform on Private and National Saving

Eric M. Engen and William G. Gale

Social Security is the largest federal government spending program and one of the most popular. The earmarked payroll taxes that finance Social Security currently exceed benefit payments. By the end of 1996, the Social Security trust fund had accumulated about $566 billion in assets and was expected to grow to over $1.2 trillion by 2010. However, longer-term projections suggest that Social Security will face financial shortfalls.

Using intermediate assumptions, the Social Security Trustee’s Report (1997) projects that benefit payments will exceed program revenue (payroll tax receipts plus interest income) beginning in 2019. Trust fund balances will then start to decline as reserves are liquidated in order to meet the payments due. In the absence of programmatic changes, full benefits will not be paid on time beginning in 2029. The actuarial deficit over the prescribed 75-year projection period is estimated to be 0.84 percent of GDP; this represents a combination of surpluses in early years and deficits in subsequent years. No official estimate of the actuarial deficit beyond the 75-year horizon has been made, and certainly major uncertainties accompany any distant forecasts, but it appears likely that the system will continue to fall further out of balance.