In just 14 years, the nation's Social Security system is projected to reach a day of reckoning: Retiree benefits will exceed payroll tax receipts, and to pay its bills the system will have to begin redeeming billions of dollars in special Treasury bonds that have piled up in its trust fund. To redeem those bonds, which represent money taken in years when Social Security ran a surplus and used for other government operations, the federal government would likely have to cut other programs, raise taxes or borrow more money.
To President Bush, this is a crisis, worth nothing short of dramatic structural changes to a social insurance system that since 1940 has lifted the elderly and disabled from poverty. To those who wish to preserve the system, it is merely the day when Congress must own up to its past profligacy and begin repaying Social Security for the trillions of dollars it has borrowed to fund immediate tax cuts and spending.
How this debate is resolved could decide the fate of Bush's ambitious plan to revamp Social Security.
"In 2018, Social Security has a legal claim above and beyond the revenues it is collecting," said Charles Blahous, the White House's point person on Social Security. "The question is what is the most sensible policy going forward so costs and benefits are spread out as equitably as possible."
"Many times, legislative bodies will not react unless the crisis is . . . upon them," Bush warned Congress at a news conference late December. "I believe that crisis is [upon them]."
Peter R. Orszag, a Brookings Institution economist who heads the Pew Charitable Trusts' bipartisan Retirement Security Project, countered that there are less drastic ways to cover the cost of trust fund redemptions than Bush is contemplating. The White House could consider rolling back its tax cuts, the size of which, he said, dwarf Social Security's funding deficit. Over 75 years, the president's tax cuts will cost the Treasury $11 trillion, nearly triple Social Security's gap during that time.
"I do think they are trying to create an artificial sense of crisis," Orszag said.
Few economists or politicians question the demographic challenge to a system that supports 47.4 million Americans. A wave of Baby Boomers will begin drawing Social Security benefits as soon as 2008, putting unprecedented demands on the New Deal-era system that has become the nation's main retirement program. The ratio of workers to Social Security retirees has been declining steadily since the system began, and it is now down to three to one. It is expected to fall to two to one over the next three decades or so.
But there is considerable debate about how dire the problem is. For example, the scope of Social Security's "problem" may be as much as $10.4 trillion or as little as $3.7 trillion, depending on whether the analysis extends infinitely into the future, as the White House prefers, or extends to 75 years, the standard actuarial window.
Also, even by mid-century, when Social Security is likely to have depleted its trust fund of Treasury bonds, it would still be able to pay 73 percent of promised benefits out of the payroll taxes. Bush asserts the system will then be "bankrupt," but opponents question that terminology, since a 27 percent benefit cut would still leave the average payment above today's level, even after adjusting for inflation.
Blahous focuses his attention on the year 2018, when the Social Security payroll tax receipts will not cover benefit payments. "The government does have to come up with more money after 2018; that is the fiscal reality," he said.
By that time, spending on Social Security will have climbed steadily, from the current $492 billion, or 4.3 percent of the total economy, to nearly $1.3 trillion, or 5.3 percent of the economy, according to the Social Security trustees. To finance a bill of that magnitude would amount to a massive shift of wealth from younger generations to the elderly, those who want to revamp the system say.
To those resistant to dramatic changes in Social Security, redeeming the bonds shouldn't be the problem. "These 'IOUs' are Treasury bonds, one of the world's safest investments," said Robert Greenstein, executive director of the liberal Center on Budget and Policy Priorities. "The Treasury, the White House and Congress cannot choose not to pay interest on the bonds or not to redeem them -- unless they're willing to have the U.S. government default for the first time in history."
The problem, rather, is facing the whole government, not just Social Security. When payroll taxes were last raised, in 1983, Congress knew that new revenue would be used to reduce the budget deficit, not saved to fund future obligations. But when the time came to pay back Social Security, it was understood that the burden would be shared by taxpayers and the government at large, said Dean Baker, co-director of the Center for Economic and Policy Research, who dubbed Social Security "the phony crisis" in a 1999 book by that title.