The Social Security Burden

by on October 31, 2004 at 7:30 am in Economics | Permalink

Andrew Samwick, who has written extensively on the issue, lays out some of the mathematics of social security debt at Vox Baby.

At present, the Social Security actuaries project an unfunded obligation of $10.4 trillion in the Old-Age, Survivors, and Disability Insurance (OASDI) program. This number comes directly from the 2004 Trustees Report released in March….Note that this is the unfunded part of the obligations–it is over and above all of the payroll taxes (12.4 percent of taxable payroll) and income taxes on benefits that go to support the program under current law….

Is having so much implicit debt a problem? I think so, and the reason is that, just like explicit debt, we accrue interest on implicit debt….if we have an implicit debt of $10.4 trillion, and the real interest rate is 3 percent, then next year, the implicit debt will grow by 0.03*10.4 trillion = $312 billion, up to $10.7 trillion, if the assumptions underlying the projection stay the same….[B]oth the President and Senator Kerry have repeatedly stated that they will not cut benefits for those at or near retirement age. …This, in turn, means that each year that elapses without reform causes the burden of financing the unfunded obligations to be shifted away from one more birth cohort that crosses the threshold of being “at or near retirement.” The more we wait, the larger the burden on future generations…

If I were running the show, both Social Security and Medicare (which has even larger unfunded obligations) would be reformed so that under current law and reasonable economic and demographic assumptions, they are projected to have zero unfunded obligations. This means changing current law to reduce future benefits, raise future taxes, or both.

See also my earlier post, The US Government is Bankrupt.

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