Promised vs. Payable Benefits
- Opponents of individual accounts frequently
suggest that the creation of such accounts would
result in cuts in the promised level of Social
Security benefits. Those critics are confusing
changes necessary to restore the system to balance
with changes resulting from individual
accounts. As noted above, Social Security faces
unfunded liabilities of nearly $26 trillion. Quite
simply, unless there is a substantial increase in
taxes, the program cannot pay the promised
level of benefits.
That is not merely a matter of conjecture; it is a
matter of law. The Social Security Administration
is legally authorized to issue benefit checks only
as long as there are sufficient funds available in
the Social Security Trust Fund to pay those benefits.
Once those funds are exhausted, in 2042 by
current estimates, Social Security benefits will
automatically be reduced to a level payable with
existing tax revenues, approximately 73 percent
of the current benefit levels.15
This, then, is the proper baseline to use when
discussing Social Security reform. Social
Security must be restored to a sustainable level
regardless of whether individual accounts are
created.
As the Congressional Budget Office puts it:
A number of recent proposals to reform
Social Security call for changes in the
program?s benefits. The effects of those
proposals are frequently illustrated by
comparing the new benefits to those
expected to arise under the policies put in
place by current law?showing whether
they would be higher or lower and by
how much. However, because of scheduled
changes in benefit rules, a growing
economy, and improvements in life
expectancy, the benefits prescribed under
current law do not represent a stable baseline.
Their value will vary significantly
across future age cohorts. Thus, focusing
on differences from current law will not
fully portray the effects of proposed benefit
changes.16
It is wrong, therefore, to attribute to individual
accounts benefit cuts that would be needed
to bring the system into balance irrespective of
whether individual accounts are created.
It is clear, in fact, that individual accounts by
themselves do not cause any reduction in total
retirement benefits (defined as the combination
of account accumulations and traditional Social
Security benefits). The best illustration of this
concept is the first of three plans proposed by
the President?s Commission to Strengthen
Social Security. That plan would create individual
accounts (2 percent of payroll is used for
illustrative purposes) but make no other changes
to bring Social Security into solvency. The
result is that Social Security remains insolvent
(although the plan does improve financing by 8
percent), but the combined benefit received by
workers is higher than benefits currently promised
by Social Security.17
Because one goal of this reform plan is to
bring the Social Security system into balance
and eliminate the system?s unfunded liabilities,
changes are made to bring the system?s
finances into balance in a <a target=_blank class=ftalternatingbarlinklarge href="http://www.cato.org/pubs/ssps/ssp32.pdf">sustainable PAYGO
system</a>. Those changes are separate from the
creation of individual accounts.
Therefore, in comparing benefit levels,
payable benefits is the appropriate baseline.
