By Arnold Kling
The 2004 Economic Report of the President also discusses Social Security. One issue is measuring the Social Security shortfall. Most economists reject the so-called “actuarial shortfall” as a measure. One alternative is the Gokhale-Smetters present value estimate. The 2004 Economic Report comes up with its own measure.
The income rate is the total amount of tax revenue collected (from both the payroll tax and the income taxation of Social Security benefits for moderate- and high-income beneficiaries) divided by the total amount of payroll on which taxes are levied. The cost rate is the total amount of scheduled benefits divided by the total payroll on which taxes are levied. The annual balance is the difference between the income rate and the cost rate in a given year.
…For 2003, the annual balance is 1.81 percent of taxable payroll…The
substantial increase in the cost rate relative to the income rate in the future causes this annual balance to change from surplus to deficit by 2018 and to widen considerably thereafter. In 2080, the annual balance will be -6.67 percent of taxable payroll…
The annual deficit of 6.67 percent of payroll is the most straightforward
way to represent the long-term fiscal challenge confronting the Social
Security program. To describe a proposed reform as having restored solvency
to Social Security, the reform must greatly reduce or eliminate these annual
Overall, my sense is that this chapter seems very consistent with my “lockbox” model of Social Security privatization. My one disappointment is that talking about future increases to the retirement age remains the “third rail” of entitlement reform.
For Discussion. How does the “annual balance” concept help to clarify discussions of Social Security’s finances?