Executive Director Bob Bixby's Testimony before the President's Commission to Strengthen Social Security


Mr. Co-Chairman and members of the Commission, thank you for inviting me to appear today to discuss the need for Social Security reform. I am here representing the Concord Coalition, a nonpartisan grassroots organization dedicated to strengthening the nation's long-term economic prospects through sound and sustainable fiscal policy.

Concord's co-chairs are former senators, Warren Rudman (R-NH) and Sam Nunn (D-GA). They, along with our approximately 200,000 members who hail from every state, have worked for nine years since the organization's founding by the late Paul Tsongas, Senator Rudman, and former Commerce Secretary Peter G. Peterson in 1992 to encourage elected officials to make the tough choices required to deal with the economic and fiscal challenges that will occur as the nation's population becomes sharply older in coming decades.

Given these objectives, The Concord Coalition heartily welcomes the effort of this Commission to strengthen Social Security for future generations. We stand ready to assist you in producing a credible plan for dealing with Social Security's long-term challenges in a fiscally responsible and generationally fair manner.

My statement today will concentrate on the need for Social Security reform, rather than the details of specific options. As the nation grapples with the challenges facing Social Security, The Concord Coalition has noticed an unfortunate tendency to rush into a debate over the pros and cons of specific reform options before fully considering the overall problem, and without stopping to consider what will happen if we do nothing. Details of reform plans are, of course, important. But before we can possibly agree as a nation on what the solution is, we need to first define the problem.

Putting Social Security reform in context

Social Security does not exist in a vacuum. The problems it will face in the future are part of a much larger retirement security challenge. And to be clear, the retirement security challenge is not just to find some extra cash for Social Security. The challenge is to prepare for the demographic tidal wave that will transform our work lives, our health care system, our economy, and our culture.

The truth is that America, along with the rest of the developed world, is about to undergo an unprecedented demographic transformation for whose vast cost it has no idea how to pay. The General Accounting Office (GAO) has estimated that without changes the combined cost of Social Security, Medicare and Medicaid will double as a share of the economy by 2030 and triple by 2050. This can only result in one of three outcomes: large tax hikes, resurgent and unsustainable deficits, or the withering away of the rest of government ¾ allowing spending on the poor, on infrastructure, and on defense to steadily decline decade after decade.

Given demographic trends, the economy in the future will be called upon to transfer a rising share of real resources from workers to retirees. These resources will be much easier to find in a healthy growing economy than in a stagnant one. The best way to achieve economic growth and increase real income in the future is to increase savings today. Savings provide the capital to finance investments, which will enhance productivity and increase the amount of goods and services each worker can produce. Without new savings reform is a zero–sum game.

Now is the time to begin preparing for the aging of America by designing a retirement system that is both more secure for the old and less burdensome for the young. Demographic and economic circumstances will never again be so favorable for Social Security reform.  However, the window of opportunity is rapidly closing.

To put it in more personal terms, consider the table below which looks at where four different generations will be at various times in their lives relative to Social Security's current outlook. What may sound like a distant and abstract problem becomes more timely and relevant when we consider that today's 30-year old will qualify for full retirement benefits in 2038 ¾ the year of projected trust fund insolvency ¾ and that the system will begin to run growing annual cash deficits before today's newborn even enters the workforce.


Ages of Persons in Four Generations at Significant Dates











90 years old

105 years old




60 years old

75 years old

97 years old

109 years old


30 years old

45 years old

67 years old

79 years old

104 years old


15 years old

37 years old

49 years old

74 years old


1.  In 2016, Social Security's dedicated tax income will no longer cover all of its expenses.  At this point Social Security will become a net drain on the budget as it begins to draw upon its claims on general revenues (i.e., the trust funds.)   The cost rate will be 13.1 of taxable pay, up from 10.5 today.  Including Medicare Part A, the tax rate will be 16.3.

2.  In 2038, all of the assets in the Social Security trust funds will be exhausted, leaving the program able to pay only 73 percent of promised benefits.  Closing the gap between promised benefits and dedicated tax income would require a 27 percent cut in benefits or a 43 percent payroll tax increase. The cost rate will be 17.7 percent of taxable payroll. Including Medicare Part A, the tax rate will be 23.7.

3.  In 2050, the General Accounting Office estimates that the cost of Social Security, Medicare and Medicaid combined will consume 21 percent of GDP, roughly all total federal revenues assuming that taxes stay at the current level of GDP (20.6 percent). The cost rate of Social Security will be 17.79 percent of taxable payroll. Including Medicare, the tax rate will be 24.99 percent.

4.  2075 is the last year of official Social Security projections.  The cost rate will be 19.4 percent of taxable payroll.  Including Medicare Part A, the tax rate will be 30.1 percent.

If we reform Social Security today, the changes can be gradual and give everybody plenty of time to adjust and prepare.  If we wait, if we follow a do nothing policy now, change will come anyway--but it is more likely to be sudden and draconian and to arrive in the midst of economic and political crisis.


Why reform is necessary

For over 60 years Social Security has provided a vital floor of protection. Its broad range of retirement, disability, and survivors' benefits for millions of Americans makes it an important issue for people of all ages.  But changing demographics render the current pay-as-you-go system fiscally unsustainable and generationally inequitable over the long-term. Reversing this trend will require facing up to some hard choices and making far-sighted decisions.

The Concord Coalition has devoted much of its time and resources to promoting bipartisan dialogue on the key long-term challenges facing Social Security, and evaluating potential solutions. Three conclusions stand out:


Conclusion #1 ¾ Changing demographics make the current pay-as-you-go system fiscally unsustainable.

  • As recently as 1960 there were 5 workers for each Social Security beneficiary. Today the ratio is 3.4 workers for each beneficiary.  As the huge Baby Boom generation retires the ratio will fall to 2 to 1.
  • This dynamic will have a profound effect on the system's fiscal sustainability. Social Security will generate ample surpluses for the next several years.  But in 2008, the year the first baby boomers will qualify for benefits, the annual cash surplus will begin to shrink, and by 2016 the trustees project that Social Security's cash flow will turn negative.
  • From 2016 through 2038 Social Security will need to draw upon interest income and eventually liquidation of its trust fund assets--special issue Treasury bonds--to pay benefits.  In 2038, the trust fund will be depleted, leaving Social Security with enough annual income to pay just 73 percent of benefits.
  • Redeeming Social Security's trust fund assets will have an impact on the rest of the budget because these assets are also liabilities to the Treasury.  To come up with the money for Social Security, Treasury will have to cut other spending, raise taxes, use any surpluses that may exist, or borrow from the public.
  • Between 2016 and 2038, the year of projected trust fund insolvency, the system faces a cumulative cash deficit of more than $4 trillion in today's dollars.

  • By 2038 the annual cash deficit will reach $330 billion in today's dollars ¾ an amount roughly the size of this year's entire budget for national defense.

  • Closing the gap in 238 would require a Social Security payroll tax hike of 43 percent or a 27 percent cut in benefits.

  • Over the trustees' 75-year horizon Social Security's cash deficit of $22 trillion in today's dollars far outweighs the cash surplus of roughly $1 trillion through 2016, and the cash plus interest surplus of $3.7 trillion through 2025.

  • As a percentage of the economy Social Security will grow from 4.17 percent today to 6.6 percent in 2038, according to the trustees.

  • More importantly, this growth in Social Security's cost will take place in the context of rising costs for other senior entitlements.  The combined cost of Social Security, Medicare, and Medicaid will grow from less than 10 percent of the economy today to over 20 percent by 2050.  And this assumes no additions to the current programs such as a Medicare prescription drug benefit.


Conclusion #2 ¾ Increasing savings to address the looming challenge is essential.

  • The Social Security challenge is really a savings challenge.  Real resources must be set aside to meet the huge retirement and health care costs associated with the coming “senior boom.”
  • A workable reform plan should pursue two strategies. First, reform should ensure Social Security's fiscal sustainability by reducing its long-term costs. Second, it should make the remaining costs more affordable by increasing national savings, and hence the size of tomorrow's economic pie.
  • Increasing savings requires hard choices. Simply counting on robust stock market returns, or presumed fiscal dividends from reform itself, is not a realistic solution.
  • There is no free lunch solution.  Each reform option involves trade-offs and each comes with a fiscal and political price, regardless of whether it aims to prop up the existing pay-as-you-go system or aims at transitioning to a partially prefunded system.


Conclusion #3 ¾ Generational responsibility requires that prompt action be taken.

  • The rationale for reforming Social Security now has nothing to do with today's retirees or those who are about to retire. For them, there is no crisis.
  • What's at stake is the retirement security of future generations ¾ those who have many working years ahead, or who have yet to enter the workforce. For them, doing nothing is the worst option.
  • The issue is what makes sense for the world of 2035, not what made sense in the world of 1935.
  • The longer reform is delayed, the worse the problems inherent in the current system will become and the more difficult they will be to remedy.
  • Delay risks losing the opportunity to act while the baby boom generation is still in its peak earning years, and the trust fund is running an ample cash surplus.
  • Squandering this opportunity would be an act of generational irresponsibility.


Why there is no free lunch

Social Security's dedicated revenues are nowhere near large enough to cover its long-term obligations. This presents policymakers with limited options, none of which is a free lunch:

  • Increase contributions to the system
  • Achieve a higher return on current contributions
  • Reduce promised benefits
  • Increase general revenue financing

Borrowing our way out of this problem is not a viable option because the demographic challenge facing the system is not a temporary bulge caused by baby boomer retirements. It is a permanent phenomenon caused by longer life expectancy.   Incurring ever-rising levels of debt to plug the gap would consume the savings needed to spur economic growth, and impose higher income taxes on future generations.

Increasing general revenue financing of Social Security might appear to be an easy option in times of budget surpluses.  But large perpetual surpluses cannot be counted on, particularly given other budgetary pressures caused by the coming “senior boom.”  More importantly, however, a large expansion of Social Security's general revenue financing would mark a substantial departure from the program's self-financing tradition.  If the link between dedicated contributions and benefits is severed, there will be less to distinguish Social Security from a welfare program, which is one reason the idea has been rejected many times in the past.  Another problem with this idea is that it would weaken fiscal discipline within the system.

Closing the gap by traditional means alone ¾ raising taxes on workers and lowering benefits for retirees ¾ would inevitably result in a less generous program paid for at an increasingly burdensome cost. This is a generational lose-lose proposition.

Transitioning out of the current pay-as-you-go system into a partially funded system, with or without individually owned accounts, inevitably requires some group of workers to pay for the pre-funding of the new system while at the same time maintaining funding for those still receiving benefits under the old system. There is no avoiding this transition cost.

Because the present system is fiscally unsustainable, some combination of cost cutting and revenue raising must be enacted. Investment income provides a way to mitigate these changes. However, no conceivable rate of return on investments, standing alone, would be enough to fund currently projected benefits at today's contribution rate.

Moreover, if workers are allowed to invest a portion of their payroll taxes in private accounts there will be that much less revenue left to pay benefits to those in the current program who are already retired, or who are about to retire. As a result, the cash flow deficit, now expected to arrive in 2016 would arrive sooner ¾ perhaps as soon as 2007. This would force policymakers to confront the impending gap between dedicated revenues and promised benefits several years earlier.

Adding personal accounts without using the current payroll tax is not a cost free solution either. It would require higher payroll contributions or a substantial and permanent infusion of general revenues.

The bottom line is that the system requires new savings and this cannot happen without sacrifice in one form or another. The choice we face is not between guaranteed future benefits under the current system and a risky path of reform; it is between reform options that, in different ways, attempt to ensure the fiscal sustainability of fair and adequate benefits over the long-term. And while there is undoubtedly a transition cost to a more funded system, there is an enormous “non-transition” cost to doing nothing.

Despite widespread recognition that hard choices are unavoidable, this difficult work is forced to compete for attention with an assortment of arguments for inaction and reform ideas that purport to fix the problem without asking anyone to give anything up. Here are five of the most frequently used arguments:


Argument  #1: Social Security can pay full benefits until the year 2038.

This argument is true as far as it goes, but it does not tell the full story.  The Trustees now project that Social Security will be “solvent” until the year 2038 -- meaning that its trust funds will possess sufficient assets, and hence budget authority, to cover benefits until that date. However, trust fund solvency says nothing about fiscal sustainability.

The problem is that the trust funds are primarily an accounting device. Social Security's assets consist of Treasury IOUs that can only be redeemed if Congress raises taxes, cuts other spending, uses surpluses, or borrows from the public. Thus, their existence, alone, doesn't ease the burden of paying future benefits.   It is true that when trust fund surpluses are used to reduce the publicly-held debt it does result in higher savings. But experience has shown that trust fund surpluses are just as likely to be spent as saved.    It, therefore, cannot be assumed that a trust fund surplus will result in higher savings.  Fiscally, it is not the trust fund balance, but the program's operating balance that matters -- that is, the annual difference between its outlays and earmarked tax revenues.

Argument #2: A mere 1.86 percent of payroll increase would cure the problem.

A related argument is that a tax hike of merely 1.86 percent of payroll is all that is needed to restore Social Security to long-term solvency.  This claim is based on the program's actuarial balance, which averages projected trust-fund surpluses and trust-fund deficits over the next seventy-five years.  In 2001, Social Security's actuarial balance was a shortfall of 1.86 percent of payroll.  In theory, this is the amount that Congress would have to raise FICA taxes or cut Social Security benefits, starting immediately, in order to keep the trust funds solvent until 2075.

The proponents of this idea neglect to mention a couple of important caveats.  For one thing, “mere” is a relative term:  A tax hike of 1.86 percent of payroll is equivalent to a nearly 10 percent increase in everyone's personal income taxes.  For another, the solution is not permanent:  It assumes that the horizon for trust-fund solvency will forever remain fixed at seventy-five years from today.  In other words, it assumes that while we would require the trust funds to be in balance over a full seventy-five years, our children will be satisfied with forty years and our grandchildren will be satisfied with an empty cupboard.

But there's a more fundamental problem.  As noted above, any trust-fund surplus is immediately lent to Treasury, leaving Congress free to spend the money it is supposedly saving.  For the 1.86 percent solution to ease Social Security's burden on the economy, legislators would have to allow the program's extra interest-earning assets to accumulate unspent for thirty years -- a proposition that seems unlikely and in any event cannot be guaranteed.

Argument #3: Saving the Social Security surplus in a “lockbox” to eliminate the publicly held debt can solve the problem.

Reducing the $3.4 trillion publicly held debt would help grow the economy, exert downward pressure on interest rates, and result in large budgetary savings from lower interest costs. But debt reduction, alone, cannot solve the problem.

In present value terms, saving all of Social Security's projected surpluses would cover only 44 percent of the cash shortfall between 2016 and 2038, the date of trust fund bankruptcy. It would cover only 17 percent of the projected shortfall over the Trustees' traditional 75-year time horizon.

Moreover, there is no guarantee that the reduction in publicly-held debt assumed by lockbox proponents will actually occur. Promising to devote the Social Security surplus to debt reduction is a fiscally responsible goal but it is easier said than done ¾ as this year's rapidly shrinking budget surplus has made clear. Regardless of intent, and despite any bookkeeping devices such as a lockbox, the government can only save the Social Security surplus if it continues, year after year, to take in more money than it needs to pay all of its other bills without dipping into the Social Security trust funds.

Success of the lockbox concept is therefore critically dependent on both the accuracy of notoriously inaccurate long-range budget surplus projections and the willingness of future political leaders to maintain fiscal discipline.

Argument #4: The Trustees are too pessimistic about the future.

Another frequently heard argument is that the Social Security Trustees are too pessimistic--that the projections are unduly gloomy about future economic growth and that with more realistic assumptions the Social Security problem disappears.

It is true that the Trustees project that the economy will grow more slowly in the future than it has in the past.  But this is a matter of arithmetic, not pessimism.  Economic growth (GDP) depends on workforce growth, and this will fall to near zero when the Boomers start retiring.

  • Since 1973, the U.S. workforce has grown by 1.7 percent per year.
  • Over the next seventy-five years, it is projected to grow by just 0.3 percent per year.
  • Given the demographics, it is unlikely that GDP growth will not slow.

A more legitimate question is whether the Trustees are too pessimistic about the growth in productivity, or output per worker hour. In the future, the Trustees may have to raise their assumption.  Since 1995, productivity has unexpectedly surged.  Some believe that this heralds the arrival of a “new economy” in which information technologies and globalization will lead to permanently higher rates of productivity growth. But there are reasons to be skeptical:

  • The new-economy thesis remains just that: a thesis. No one yet knows whether the surge in productivity that began in the mid-1990s will outlast the current business cycle. The Trustees' current long-term assumptions for productivity growth--1.5 percent per year--are right in line with the record of the past twenty-five years.
  • Even if the enthusiasts are right about the new economy, higher growth is no long-term cure-all for Social Security. When productivity goes up, average wages go up, and this adds to long-term tax revenues. But when average wages go up, average benefit awards also go up, and this adds to long-term outlays.
  • Practically, the only way to get big savings from higher productivity growth is to sever the link between average wages and new benefit awards.  The United Kingdom has done this, and the reform stabilized its long-term pension outlook.  Without such a fundamental change, higher productivity growth alone cannot possibly save Social Security.

There is one aspect in which the Trustees are indeed pessimistic--but here greater optimism would obviously add to Social Security's costs.  The Trustees project that mortality rates will decline more slowly in the future than they have in the past--and that longevity will therefore grow more slowly.

  • According to the Trustees, life expectancy at age 65 will grow at just half the pace over the next seventy-five years as it has over the past seventy-five.
  • Some biotech optimists are now predicting that a life expectancy of 100 or more is attainable within a generation.
  • If anything approaching that came to pass, the entire structure of old-age entitlements would be rendered instantly and massively unaffordable.
  • But one doesn't have to agree with these visionaries to conclude that the Trustees are too conservative.  Accepting their projections means believing that Americans will have to wait until the mid-2030s to achieve the life expectancy that the Japanese already have today.

Argument #5: Investment returns provide a “pain free” solution.

Moving toward a more funded Social Security system could indeed have enormous benefits: not just higher returns to retirees, but greater national savings and productive investment, and hence greater wage growth for workers in the years before retirement. It would also be the surest method of locking up the Social Security surplus because it would prevent the government from spending the money on other programs. But it cannot be supposed that directly funding more of Social Security's benefits is a way to avoid the hard choices.  It is the hard choice:

  • The challenge is that, until the transition is complete, workers will have to pay more, retirees will have to receive less, or both. Reform plans that do not face up to this transition cost will not result in new net savings or a larger economy. Any gains for future beneficiaries will necessarily come at the expense of future taxpayers.
  • It is neither realistic, nor economically sound to count entirely on the historic spread between the investment returns on stocks and bonds to fund a reform plan without cost reductions or higher contributions.
  • Projected budget surpluses provide a tempting source of funding for personal accounts. But projected surpluses are far from reliable. More importantly, even if the future unfolds exactly as projected, the surpluses won't last forever. And when they vanish Congress will have to fund the new Social Security accounts by selling bonds to the public (i.e., borrowing) unless taxes are raised or spending is cut. In that case, all the plan will have created is another unfunded entitlement.
  • The fundamental issue is not whether the system should be public or private, but the extent to which it should be unfunded or funded. Unfunded personally owned accounts would neither add to national savings nor reduce the burden of today's system on future generations, even if they earn a higher rate of return than the current pay-as-you-go system. A new system of unfunded accounts, like trust fund solvency, avoids the real challenge, which is to ensure that adequate resources are set aside to meet the cost of future benefits.

Without new savings, without real funding, a plan cannot increase the productivity of tomorrow's workers, and thus becomes a zero-sum game of pushing liabilities from one pocket to another or from one generation to another.


Looking Ahead

Today's Social Security system is more than adequate to meet its obligations to those who are already retired. Indeed, today's retirees, on average, will get a better deal from Social Security than any category of similarly situated retirees will enjoy in the future. And, while the baby boomers can expect less generous benefits relative to their payroll contributions than their parents now enjoy, fairly modest changes could be enacted to keep the current system solvent for most boomers.

But what of the so-called Generation X'ers, those born in the post-boom “baby bust” years of the late 1960s and 1970s? And, what of today's children, those who are now relying on their baby boomer parents and WWII generation grandparents to leave behind a growing economy, to say nothing of a secure retirement system?

Too often, it is the young who are overlooked in the Social Security reform debate. And yet, today's young people are the ones who are expected to pay the higher taxes, accept the lower benefits, and bear the burden of debt incurred between now and their “golden years” to keep the current pay-as-you-go system going for their elders.

Public opinion surveys have indicated declining confidence in Social Security over the past 25 years. Many younger workers are beginning to discount Social Security entirely in their retirement planning. This decline in public confidence is itself a major problem for a system that depends critically on everyone's approval and trust.  Social Security is a generational compact in which each generation's welfare depends directly upon the willingness of the next generation to participate.  If the next generation grows disaffected, the survival of the system is thrown into question.

In the end, Social Security reform is about the young. It is about today's workers and retirees exercising stewardship over the future, and preserving the sacred trust of generational responsibility. 

 GAO's “Save the Social Security Surpluses” simulation which assumes revenue as a share of GDP declines from its 2000 level of 20.6 percent due to unspecified permanent policy actions. In this simulation, policy changes are allocated equally between revenue reductions and spending increases.