Saving Social Security
Will the system go broke?
By Adriel Bettelheim

America's 76 million baby boomers pose a catastrophic threat to the nation's social safety net. Simply put, the Social Security system won't take in enough money to pay all of the boomers' guaranteed benefits as they retire over the next 30 years. To meet these obligations, the government will either have to raise workers' payroll taxes, cut benefits or take more drastic steps, such as raising the. . . .

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Will privately invested retirement accounts relieve the financial squeeze facing the Social Security system?

Edward H. Crane President and CEO, Cato Institute, Washington, D.C.. From an address delivered in Paris, Dec. 10, 1997, reprinted in vital speeches of the day, April 15, 1998.	Henry Aaron Senior Fellow, The Brookings Institution. From testimony before the Senate budget committee, July 23, 1998.

Understanding Social Security

• Social Security, created in 1935, is the most costly item in the federal budget. The program provides old age, survivors' and disability insurance to approximately 44 million Americans. Workers and their employers fund the system by each paying payroll taxes equivalent to 6.2 percent of covered wages. Self-employed individuals pay 12.4 percent of taxable self-employment income. The Internal Revenue Service collects the taxes and deposits the money in government-administered accounts known as the Old Age and Survivors and Disability Insurance Trust Funds (OASDI).

• The payroll tax revenues are used to pay benefits to those people currently collecting Social Security pensions, a system known as pay-as-you-go. Any excess of taxes over benefit payments is invested in U.S. Treasury bonds, which earn the average rate of return on publicly traded government debt. Social Security taxes also pay for Medicare, the national health program for the elderly. The services that are funded come under Medicare Part A and include inpatient hospital care and skilled nursing care.

• Workers who accumulate enough earnings credits become eligible to receive a Social Security pension when they reach the early retirement age of 62 or become too disabled to continue working, regardless of age. A workers' dependent spouse and non-adult children can draw monthly survivors' pensions when the worker dies.

Social Security is a defined-benefit pension program, meaning each pension is based on the worker's average career earnings and on the age when the worker or worker's dependents first obtain the pension. The exact amount of the payout is determined by a formula that is codified in law and updated annually to reflect changes in wages and consumer prices.

The Social Security benefit formula is deliberately tilted in favor of workers with low career earnings, those who face an unusually high risk of becoming totally disabled and married couples with only one wage earner. It's possible to make generous payments to these groups because high-wage workers, unmarried and childless workers and dual-income married couples receive less favorable treatment under the system.

• In 1997 the Social Security system took in $457.7 billion from payroll taxes and bond interest and paid out $362 billion in benefits to retired and disabled workers and their families. Administrative costs totaled $3.4 billion. The system's assets increased $88.6 billion, to $655.5 billion, and the trust funds earned $43.8 billion on bond interest.

• The trust funds are expected to be able to cover benefits for the next 34 years. However, the 1998 Social Security trustees' report states that benefit payments will begin to exceed income in 2013, and that interest income on the Treasury bonds will be able to keep total income ahead of benefit payments only until 2021. After that, the trust funds will begin to decline until they are exhausted by 2032. At that point, tax revenue will only be able to pay three-quarters of benefit obligations.

Sources: Social Security Administration, Brookings Institution