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5 Federal Tax Policy Memo 1 (1981)

handle is hein.tera/fetxcyemo0005 and id is 1 raw text is: TAX FOUNDATION'S 7e4ai67p Poat? 40~ 1 !*oM February 4, 1981 VOL. 5 NO. 1 THE SOCIAL SECURITY TIME BOMB MARGINAL TAX RATE IN 1981 Economist Paul Samuelson once referred to the social security system as a perpetual Ponzi game. Those in the work force would willingly contribute mushrooming sums to the support of the disabled and retired in the expectation that they will get their share--and, hopefully, a lot more than their share of past contributions--in future benefits. Samuelson was not troubled by this, having faith in the continued real growth of the economy to justify these expectations. Now, in looking at the well-advertised problems of social security, one might conclude that Samuelson's description was accurate, but that the system will end up just like Ponzi--busted. That could happen. In fact, if nothing is done to change social security and economic conditions do not improve swiftly, it will happen quite soon--specifically, between July and ovember, 1982--for the Old Age and Survivors' Insurance Fund. It's not likely to happen at soon because both the Hospital Insurance and Disability Insurance funds are in much etter shape than OASI, and everyone is now assuming that there will be some swapping around or borrowing between these funds to keep them afloat over the short term. But there's no assurance that even complete comingling of the funds, which would take some legislative effort, will provide enough cushion for the 1980s. The next crisis point may well be 1984-85. After the early 1990s, according to economic projections and counting on the higher tax rates under the schedule of existing law, there should be an approximately 30-year breathing spell. Along about 2020, the system will face an even more serious crunch because the baby boom generation of World War II will be retiring, and, with the expectation of continuing low birth rates, there just won't be enough workers to support them in the style of the present. Long-term imbalances in social security financing have been foreseen for years. But now, again, there are two fuses on the social security time bomb--short and long. Both must be defused. Furthermore, we can't be complacent about the 21st century just because it's still a long way off. The most sensible and nonexplosive steps to solve the long-term problem will have to be initiated within this decade. The 1980s The table below capsules in the simplest manner possible the relatively grim outlook for the social security system over the next few years. It shows the projected fund assets at the beginning of each year as a percentage of payments (outgo) during that year for OASDI, HI, and the total. The HI fund is much smaller, of course, so that the relatively comfort- .ble asset coverage in that fund during the period ahead only mitigates the situation with spect to OASDI, assuming comingling of funds. Anything less than one month's leeway (8.3% of assets to a year's outgo) must be considered the crisis stage.

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