Social Security

 Yet, a few decades later, proposals for major reforms of Social Security are back under discussion. The exact form that Social Security will take in the coming decades is an open question that will continue to play a major role in political debate. We explain the details of the system more carefully later in this chapter, but the basic idea is the following. The government taxes current workers and uses those revenues to pay retired workers. When the system was originally set up, the idea was that payments to retired people in a given year would be (approximately) funded by taxes on those working during that year, so the system would be roughly in balance. For many years, this “pay-as-you-go” structure worked fine. In some years, payments to workers were larger than tax receipts, and in some years, they were smaller, but on the whole there was an approximate match between payments and receipts. In the 1980s, policymakers first began to pay serious attention to the fact that there was a problem with the pay-as-you-go structure. Demographic changes mean that the system is not balanced in the very long run. The number of retirees relative to the number of workers will increase substantially over the next two decades, and without changes, the time will come when tax revenues will no longer be sufficient to match the obligations of the system. This is not a looming crisis. The best estimates suggest that the system will no longer be able to pay the full amount of benefits near the middle of the century, although there is disagreement on the exact date. The most recent Social Security Trustees report (http://www.ssa.gov/OACT/TRSUM/index.html) predicted this date as 2036, whereas in 2005 the Congressional Budget Office (http://www.cbo.gov/ftpdocs/60xx/doc6074/02-09- Social-Security.pdf) gave a date of about 2054. [1] Of course, changes will almost certainly be made well before this crisis point. But what form should those changes take?