Common Sense on Social Security

A Centrist Perspective on the Social Security Reform Dilemma

Social Security Reform: Breaking the Stalemate

Section 2. The Quarter Century from Hell

Right now, the nation's elderly population is coasting along, with the share of the population sixty-five and over keeping steady at 12%. This holding pattern won't last much longer. The quarter century from 2008 to 2033 is destined to reshape America's demographic landscape quite profoundly. Those sixty-five and older will swell from 12% to 20% of the total population, an enormous increase within a single generation. By 2033, forecasters say the workforce covered by Social Security is likely to add another 20 million people, growing from 150 million to 170 million. Over the same period, they expect the beneficiary numbers to grow by 40 million, from 45 million to 85. Forty million more beneficiaries, only twenty million more workers. Ouch! That's quite pinch.

And the expansion of the senior population doesn't end there, although there is a slowdown. By 2075, Americans sixty-five and older are expected to make up 22% of the total population, a gain of two additional percentage points. Social Security cost forecasts mirror the explosion in the nation's elderly population almost perfectly. Think of the cost curve facing Social Security as an S-Curve. Color it red. From now through 2007, the cost curve rises only mildly, from 10.8% of taxable payroll today to 11.4% of taxable payroll eight years from now. In 2008, though, the red cost curve bends upward and climbs on a steep trajectory for twenty-five straight years, finally cresting in 2033, at 18.1% of taxable payroll. After the crest, mercifully, it flattens out somewhat. By 2075, the cost of paying Social Security benefits under current law benefit schedules is projected to be 19.9% of taxable payroll.

While the cost curve is an S-curve, Social Security's revenue curve, derived primarily from payroll taxes, is very nearly a straight line. In your mind's eye, color it black. The combined employer-employee tax rate is 12.4%. Total baseline revenue is slightly higher, though, thanks to the fact that taxes collected from retirees are partially recycled back into Social Security's coffers. Since revenues from the taxation of retiree benefits are scheduled to increase slowly over time, baseline revenue should be worth 13.3% of taxable payroll by 2075.

Note the ultimate size of the gap. Revenue equal to 13.3% of taxable payroll in 2075. Benefit obligations equal to 19.9% of taxable payroll. A financing gap equal to 6.6% of taxable payroll. Stated in GDP terms, Social Security's financing gap is expected to reach 2 1/3% of GDP by 2075, with program revenues a shade below 43/4% of GDP and program obligations a bit higher than 7% of GDP.

As of now, and for the next 14 years, Social Security's cash flow is positive. With an asset value now equal to 10% of GDP, the Social Security Trust Fund faces 14 more years of steady growth. By 2014, the Fund's value should top out at 19% of GDP, with all its assets by law invested in Treasury bonds.

The years of surplus come to an end in 2014, when the black line of revenue is intersected from below by the red line of cost. After that, as the red cost line ramps steadily upward, Social Security's cash flow becomes increasingly negative. For a time, interest earned on Trust Fund assets is sufficient to make up the difference. By 2021, however, Social Security begins eating away at Trust Fund principal. By 2034, the Trust Fund is empty and Social Security is insolvent. The quarter century from hell ends with Social Security on the rocks.

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Common Sense on Social Security
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Revision Date April 13, 2006