Is Social Security headed for a crisis sooner than thought? Although President Bush says so, not everyone agrees. The system's trustees estimate the Social Security trust fund is in good shape for another four decades. The nonpartisan Congressional Budget Office figures five decades. Many independent economists think Social Security is healthy for more like six or seven decades.
But there's a vocal contingent that thinks Social Security has much more urgent problems. For years, Social Security has been amassing surpluses that the system's trustees use to accumulate Treasury bonds in its trust fund.
But as the baby boomers begin to retire, they're going to have to start selling those bonds back to the federal government in order to raise money to pay benefits. This could happen as soon as 2018, little more than a decade away.
To some people, this looks like a shell game, one branch of the government merely redeeming IOUs from another branch. Sen. Wayne Allard (R) of Colorado, for example, told constituents recently, "The money is spent. I don't believe, in my own opinion, we'll be able to raise the funds to pay it back."
This statement betrays a fundamental misunderstanding of how Social Security works. Unlike ordinary government functions, Social Security is funded by its own tax, the payroll tax. In 1983, at a time when Social Security was genuinely facing a crisis - it was mere months away from failing at the time - a commission appointed by President Reagan and headed by Alan Greenspan proposed a series of fixes. Among other things, the Greenspan commission recommended increasing payroll taxes.
But there was a twist: Knowing that the baby boomers would begin retiring around 2010, Mr. Greenspan recommended raising payroll taxes by much more than was needed to pay benefits at the time. The surplus would be used to buy Treasury bonds, which could be redeemed when the boomers retired and payroll taxes were no longer sufficient to fully fund retirement benefits.