Consider the role of Social Security in the size of the projected U.S. government budget deficits...

Consider the role of Social Security in the size of the projected U.S. government budget deficits in the coming years. • What is the central problem for Social Security? • What are some proposed solutions to this problem? What do you see as the costs and benefits (disadvantages and advantages) of these various solutions? (Remember that costs and benefits do not have to be strictly monetary—they can involve other criteria as well.) • Draw conclusions about what approach we should take to address Social Security.

Expert Solution

Social Security faces a serious financial shortfall, but there is no shortage of Social Security myths designed to draw attention away from the need for action. One such myth is that because interest payments will cover the gap between Social Security benefit outlays and tax revenue, there is little need to worry about the financial state of the program.

Since 2010, Social Security has been running cash deficits -- meaning that the total tax revenue it brings in from the payroll tax and income taxation of benefits has fallen short of benefit payments. So far, those deficits have exceed $70 billion.

However, the Social Security trust fund (technically, the hypothetical combined Old-Age Survivors and Disability Insurance trust fund) currently holds $2.8 trillion of government bonds which accumulate interest each year (these interest payments represents a cost to the rest of government). Including interest payment, Social Security is likely to run a small surplus -- about $15 billion -- as compared to its $70 billion cash deficit. This has led some to conclude that Social Security is in a strong fiscal position. This conclusion is wrong for several reasons:

1. Cash Deficits Are a More Meaningful Measure of Social Security's Health

2. Social Security's Finances Are Worsening Under Either Measure

3. Social Security's Trust Fund Ratio has Been Declining Since 2010

4. Interest Income Doesn't Matter When Viewing Social Security from a Budget Perspective

5. Social Security Faces Serious Large Long-Run Challenges

Rahul Sunny answered 2 years ago

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