Working Paper: NBER ID: w11060
Authors: Jagadeesh Gokhale; Kent Smetters
Abstract: The U.S. Social Security system has helped keep many retirees out of poverty. However, according to the Social Security and Medicare Trustees, Social Security faces a future financial shortfall of $10.4 trillion in present value. This enormous imbalance has received little attention in public debates about Social Security. Instead, the media and policymakers continue to focus on the program's trust fund and several other ad-hoc measures that create a misleading impression of the size of Social Security's financial problem. Although the Social Security Trust Fund is not projected to be exhausted until 2042, Social Security's $10.4 trillion present value imbalance is accruing interest and will grow by $600 billion during 2004 alone. The current cash-flow federal budget, however, is biased against reforms that would improve Social Security's finances. As shown herein, a new federal accounting system would remove this bias.
Keywords: Social Security; Financial Sustainability; Policy Reform
JEL Codes: H0; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Demographic shifts (baby boomer retirements) (J26) | U.S. Social Security system's financial shortfall of $10.4 trillion (H55) |
| Pay-as-you-go financing system (H55) | U.S. Social Security system's financial shortfall of $10.4 trillion (H55) |
| Traditional measures of Social Security's financial health (H55) | Misleading impression of the system's viability (P27) |
| Reforms allowing participants to carve out a portion of their payroll taxes (H55) | No effect on overall financial imbalance (F65) |
| Reforms allowing participants to carve out a portion of their payroll taxes (H55) | Negative impact on traditional financial measures (G32) |
| Without reforms (E69) | U.S. Social Security system's financial shortfall will continue to grow (H55) |