Social Security:
Keep Pay-As-You-Go Funding

by Dan Cornwell, The Madison Institute (September, 2002)

Everybody seems to be searching for an easy fix to give the appearance of long-term fiscal balance without reducing lifetime benefits. It can't be done.

Investment schemes have been offered as a painless way to improve benefits. Privatizers have shamelessly exaggerated the returns from investment funding while hiding the cost of switching to such a system.

The fact is that no investment-based system can do better than the current pay-as-you-go type of system. It is honest, efficient, predictable, transparent.

For several decades, our political leaders have refused to face the fact of gradually increasing lifespans and reduced per capita birth rates. Adjustments can and should be made within the pay-as-you-go system to deal with these demographic realities.

It has been obvious to anyone who understood the problem and looked at it honestly that switching to a system of private accounts cannot improve benefits. The President's Commission on Social Security labored for a year to design such a plan. The plans it offered contain severe benefit cuts and still require huge infusions of cash from general revenues. The Commission did its best to conceal the benefit cuts and avoid facing the system's huge deficits, but the cuts and deficits become clear if you look carefully.

The most sensible answer to the problem is to stay with pay-as-you-go funding and make modest adjustments to achieve fiscal balance. The adjustments could include a gradual increase in the retirement age, an increase in the tax rate for upper income workers, and some use of general revenues to help make up for unusual demographic shifts.

Other adjustments than those mentioned could be made, but there is nothing to be gained and much to lose by changing even in part from pay-as-you-go to an investment-based system.

At the same time, adjustments can and should be made to improve fairness in the treatment of married and divorced couples. There is a great need to improve benefits for low-income workers (principally but not exclusively women) who have raised children.

Although the author is associated with The Madison Institute, the views expressed are his own and do not represent views of the Institute.

Tape of talk "Privatizing Social Security", (1999)

Also see summaries of talks on Privatization.

Earlier Articles on Social Security by Dan Cornwell

"Social Security: The Case for Pay-As-You-Go", 1997. (32 pages).

"Social Security Reform Hidden Behind Myths", published in The Wisconsin State Journal, February 15, 1998. (2 pages)

"Pay-As-You-Go Social Security", 1998. (19 pages)

"Pay-As-You-Go Social Security: Highlights," 1998. (2 pages)

"Social Security: For You or for Wall Street?", 1998. (8 pages)

"Social Security: Win the Battle and Lose the War?" 1998 (2 pages)

Websites with Good Information About Social Security

The Century Foundation:  www.tcf.org. In an ongoing project to educate the public on Social Security issues, The Century Foundation has published a number of very readable books (see above for examples). The website is now presenting brief reports (3 pages or so) which highlight key issues in the debate. This is an excellent source of reliable information and ammunition for defending Social Security.

Social Security Administration: www.ssa.gov. This site has much general information about Social Security benefits. A calculator lets you estimate your future benefits.

"2002 Annual Report of the Board of Trustees of The Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds" (March, 2002): www.ssa.gov/OACT. This report contains a wealth of economic and demographic data used for projection of future income and costs. (The Office of the Chief Actuary is staffed by non-political experts.)

Recommended Books on Social Security Reform

  1. Henry L. Aaron and Robert D. Reischauer, "Countdown to Reform: The Great Social Security Debate", The Century Foundation Press, New York (1998). The authors are well-known economists associated with the Brookings Institution, a moderate "think tank". They explain the major issues in the debate and suggest modest reforms designed to preserve most of the features of the current system.
  2. Robert M. Ball, "Straight Talk About Social Security", The Century Foundation Press, New York (1998). The author was Commissioner of Social Security (1962-73) and is a distinguished scholar in the field of social insurance. He presents estimates of the fiscal effects of various changes which might be made to restore fiscal balance.
  3. C. Eugene Steuerle and Jon M. Bakija, "Retooling Social Security for the 21st Century", The Urban Institute Press, Washington D.C. (1994). The senior author, an economist at The Urban Institute, has written many articles on Social Security and frequently has been invited to testify before Congressional committees. This book describes the background and principles underlying Social Security. It presents results of extensive calculations estimating costs and benefits for various cohorts.