MEET TOM SAVING:
For Our Grandchildren's Lea Abdnor recently visited with Tom Saving.
In 2000, President Clinton appointed Dr. Saving as a Public Trustee of the Social Security and Medicare Trust Funds. On May 2, 2001, President Bush named Dr. Saving to the bipartisan President's Commission to Strengthen Social Security. On November 3, 2005, President Bush nominated Dr. Saving for a second term as a Public Trustee of the Social Security and Medicare Trust Funds and then when Congress failed to act, in April, 2006, the President recess appointed Dr. Saving to that position.
Dr. Saving is a University Distinguished Professor of economics at Texas A M University and serves as director of the Private Enterprise Research Center at Texas A&M. Dr. Saving is senior fellow at the National Center for Policy Analysis and a member of the For Our Grandchildren National Advisory Council.
Interview
Abdnor: As one of the six Trustees of the Social Security program, what advice would you give to ordinary Americans? What can they do to help fix the program?
Tom Saving: First, citizens should take some time to understand how the current system will affect them, both in terms of what they will have to pay during their working years and what they might receive during their retirement years. By this I do not mean applying the current FICA tax rate to their future income to estimate what they will pay and using the annual notice they get from Social Security to estimate their benefits. What I mean is that they should familiarize themselves with the Social Security budget to see the growing size of the forecast deficits that will begin in 2017. It is also important for citizens to understand that government will continue to exist after that time and will probably not get smaller. The implication of the growing Social Security deficit and government not getting smaller is rising taxes in their working years and lower benefits in their retirement years.
Once this reality check is complete, citizens should confront their representatives in Congress with the question of how they plan on covering the deficits that will reach $90 billion in just 15 years, $221 billion in 25 years and $257 billion in 35 years, using up 15 percent of all federal income tax revenues. For example, for a young person of 27 years of age, retiring in 40 years, the deficit that workers will have to cover to pay your retirement will be $262 billion, or $900, in current dollars, for every man, woman, and child under 65 years of age, or, $3,600 for a family of four. Then judge the truthfulness of their responses and get rid of the ones who want to bury their heads in the sand.
Abdnor: Many people claim that Social Security's problems are exaggerated and that maybe the system won't go broke. In your opinion, what are the chances that Social Security will remain solvent without legislative action?
Tom Saving: If we define solvency as having income that is greater or equal to expenditures, then without legislative changes there is no chance that Social Security can remain solvent. The key here is the phrase, 'legislative action.' There are no guarantees in Social Security. Essentially each participant has a deal with Congress that members of Congress can change anytime they choose. Would anyone willingly enter into a contract with someone if the other party could change the contract at any time and in any way they choose. Of course not! When the Social Security legislation is changed, and it must be changed, we should aim for a system that when you shake hands with your representative in Washington, you have a deal that you understand and know will last.
Abdnor: Many people don't understand the Social Security trust fund. Can you explain what it is and how it works?
Tom Saving: In effect, the Trust Fund is a bit like the government's left hand writing its right hand a billion dollar bond and then the right hand claiming that it's rich. The real danger of Trust Fund accounting is that the public or Congress may be mislead into believing that there is a Trust Fund solution to Social Security's future financial shortfalls. Concentration on the Trust Fund gives credence to a solution that would, for example, increase the interest rate paid on the Trust Fund from its current level of the average rate of interest on government debt of 10 years and under, to six percent real, i.e., inflation adjusted. Indeed, from the perspective of the official definition of solvency, Social Security would be solvent into the indefinite future. But the general revenue transfers necessary to provide currently scheduled benefits would remain unchanged. Thus, while after the increase in interest payments credited to the Social Security Trust Fund it would never be exhausted, from the perspective of the total federal budget, nothing would have changed.
In the current legislation, the Trust Fund represents the authorization to pay benefits. After 2016, when Social Security revenues fall below total benefit payments, the payment of benefits requires the Treasury to redeem Trust Fund bonds as they are presented by Social Security. Since the Trust Fund yields no revenue to the Treasury, these redemptions must come from general revenues, such as the income tax. Once the Trust Fund is fully redeemed, then current law would require that total benefits paid not to exceed Social Security revenues. However, the key here is the phrase, 'current law.' At any time Congress can change the law so that general revenues could be used to pay benefits, or they can raise payroll taxes or cut benefits. The most important point is that the future Social Security deficits that begin in 2016, must be covered by general revenues if the benefits are to be paid, no matter if the Trust Fund is zero or infinite.
Abdnor: What does it mean when people say that Social Security is a 'pay-as-you-go' system?
Tom Saving: A 'pay-as-you-go' system is one in which the current expenses of the system, in the case of Social Security these expenses are the payments to beneficiaries, are paid using the current revenues to the system, the receipts from payroll taxes and taxation of Social Security benefits. Since the 1983 Social Security reform, the revenues into Social Security have exceeded its expenditures with the excess being spent by Congress and simultaneously credited to the Trust Fund. The important thing here is that the contributions made by any one person, are not put aside and invested to pay the future benefits of that person, as they would be in a 401K, for example. Rather, these contributions are used to pay the benefits of current retirees. The retirement benefits of those currently working will then have to be paid by future workers.
Abdnor: President Bush tried to enact Social Security reform but wasn't able to get Congress to pass legislation. What is the effect of not fixing the system? Does delaying action make the problem harder to fix?
Tom Saving: By failing to act on reform and remaining in the current system entails finding the revenue to pay the scheduled benefits. There are two ways to find the revenue to pay these benefits: (a) allow the payroll tax rate to rise to cover benefits; (b) use general revenues to augment payroll tax receipts. Once 2017 is reached, payroll tax rates must rise rapidly from their current level of 12.4 percent to 14 percent in 2020, just three years after the system experiences its first deficit, 15.4 percent just five years later in 2025, and 16.6 percent in another five years, in 2030.
If we use general revenues rather than increased payroll taxes, then other taxes must rise or federal expenditures must fall. Just ten years after the system experiences its first deficit, $200 billion 2006 dollars must be transferred from general revenues to Social Security if currently scheduled benefits are to continue being paid. Moreover, by the year of forecast Trust Fund exhaustion, 2041, the general revenue transfer will grow to $355 billion 2005 dollars. Transfers of this magnitude imply that Congress will be giving up discretion over more than 15 percent of all federal income tax revenues.
Importantly, the longer we wait to reform the system the more it will cost. In effect, by waiting we allow the large population of baby boomers, who could be part of the solution, to retire and become part of the problem.
Abdnor: I know that you discussed this issue recently with some college students from Indiana. Are young people beginning to understand the impact on them if we fail to act?
Tom Saving: The great advantage of discussing this issue with young people is that Social Security's future problems are their problems, not the problems of the elderly. If nothing is done, they will be the ones who suffer by paying higher taxes during their working years and receive lower benefits during retirement. Thus, even though retirement is the furthest thing from the minds of the young, their near term and future income is not. When I present them with the payroll tax rates they can expect, it gets their attention. The future is theirs and they can and should insist that their representatives in Washington reform Social Security responsibly. It is important that the young do what they can to insure that reform takes the future out of the hands of politicians and places it in the hands of each individual. Reform should give individuals a right to their future.
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