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Can America Afford to Grow Old? Paying for Social Security.

The 1983 Amendments to the Social Security Act were intended to restore social security to financial solvency, following a period of annual deficits in the late 1970s and early 1980s that would have exhausted the Old-Age, Survivors, and Disability Insurance (OASDI) Trust Fund in 1983. Building on a structure established with the 1977 Social Security Amendments, the new law magnified a projected series of annual surpluses in the OASDI program that, in 1983, were expected to accumulate (with interest) to a peak value of nearly $18 trillion in nominal dollars roughly a quarter of the way through the next century and subsequently decline sharply. (The estimated peak value has been regularly revised downward since then, and is currently projected to be $8 trillion in 2025.)

The immediate threat of insolvency was averted, but a new "threat" was created -- a threat of solvency. Some argued that the trust fund would become so large that it would soon absorb all outstanding federal debt and, even more ominously, create the potential for government control, through share ownership, of a substantial number of private enterprises. The ensuing public policy discussion has focused on the likelihood of such outcomes and on ways in which the accumulating surpluses could be managed.

This study by Aaron, Bosworth, and Burtless provides a thorough analysis of the economic and budgetary issues that underlie this debate and contains a thoughtfully structured reform proposal reflecting their view that the surpluses should be used to raise permanently the national saving rate rather than to finance general budget expenditures. Their plan removes both the OASDI and the Hospital Insurance (HI) Trust Funds from the budget and holds the deficit in the remaining accounts (that is, the non-OASDHI budget) to 1.5% of GNP. Further, whenever the combined OASDHI Trust Fund is projected to go out of long-run actuarial balance, payroll taxes are raised to restore balance, thus creating a permanent trust fund. Unified budget surpluses, which would arise when the OASDHI surpluses exceed 1.5% of GNP, would be used to retire publicly held federal debt and, eventually, to invest in federally backed and possibly private sector securities.

The book is organized into seven chapters, with the last four containing the core of the discussion. The first three chapters, which are essentially expository, describe the Social Security and Medicare programs and summarize the 75-year financial outlook, as of 1988, for the OASDHI and HI Trust Funds. The fourth chapter outlines the model used to simulate the effect of increased government saving on total national saving and to determine the size of the economic burden arising from social security benefits promised to the large number of retirees expected in the next century. The remaining chapters describe the method of estimating the reduction in the future social security burden if government saving is increased; examine the potential consequences for capital markets if substantial trust fund accumulation occurs; and analyze alternative social security reform proposals designed to handle the consequences of the trust fund build-up.

The analysis is highly dependent on the model used to simulate the economic effects of a pro-saving government budget policy. It is a standard neoclassical growth model based on a Cobb-Douglas production function with a cohort-based social security module appended. Most readers will find the model acceptable, although those who believe in strong Ricardian equivalence or a substantial positive labor supply elasticity will not be completely satisfied.

The model simulates fiscal policy scenarios that "save" the social security surpluses. The policy responses are summarized by comparing, for selected projection years, the difference between the baseline social security burden -- defined as the excess of the projected social security benefit share of Net National Producet (NNP) above the 1986-90 share -- and the increase in consumption (less induced social security benefit increases) that results from lowered unified deficits. When fiscal policy is managed in this manner, higher output and real wage growth occur in a closed economy, reducing the burden on future workers. The effects of the policy are also illustrated in an open economy, assuming highly stylized international capital market behavior.

When the authors' budget and OASDI Trust Fund policies are followed, the closed economy simulations predict that the benefits of higher economic growth exceed the retirement (and disability) financing burden on future workers. Payroll taxes would be raised three times, adding 2.4 percentage points to the combined employer and employee rate (currently 12.4%) during the 75-year projection period. When the policy is expanded to include the HI Fund, most of the (increased) burden is eliminated, but an amount equal to about 1% of NNP (about a third of the baseline burden) remains at the end of the projection period. The simulations also demonstrate that the burden-reducing effects of higher government saving are relatively stronger for lower total factor productivity growth paths, suggesting that a "save the surplus" policy could provide insurance against unexpectedly slow productivity growth.

As a whole, the book provides a comprehensive discussion of the questions underlying the social security surplus debate that is valuable for specialists, as well as readers with only a casual interest. Some issues, however, would have benefited from a more detailed treatment.

Additional discussion could have been devoted to comparing the authors' recommended policy of permanently (partially) funding social security with a more traditional pay-as-you-go funding policy. Their proposal has intergenerational equity implications similar to those of standard privatization schemes. Further, adding the HI Trust Fund to the build-up process leads to higher government saving and more frequent payroll tax increases (a cumulative 6.9 percentage points by the end of the projection period). But including the pre-funding of HI as part of a government saving strategy is primarily justified as a logical extension of the advance funding of OASDI. The programmatic suitability of pre-funding HI is not addressed adequately. Overall, an impression may be left with some readers that the authors' sole policy objective is to achieve higher national saving by lowering federal deficits, and that social security financing reform is merely a convenient way of attempting to reach that goal.

John C. Hambor

Senior Economist U.S. Department of the Treasury
COPYRIGHT 1992 Sage Publications, Inc.
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Hambor, John C.
Publication:ILR Review
Article Type:Book Review
Date:Jan 1, 1992
Words:1020
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