8-1 - Comment

Summary

Introduction

More than six decades after its introduction, the Social Security system faces a funding crisis. By most accounts, Social Security benefits paid out to recipients will exceed Social Security contributions in just over a decade, and the trust fund will fail to meet its entire obligation in just over thirty years. More uncertainty surrounds the magnitude of the adjustments required to maintain the solvency of the system, however. As the authors argue, the potential size of the required payroll tax hike (40 to 60 percent) and/or benefit reductions merits an evaluation of the methods used to generate the figures. Additionally, less discussed are the distributional implications of the adjustments required to maintain the financial solvency of the system.

The chapter by Caldwell and his colleagues has two broad objectives. The first part of the chapter is primarily methodological, providing an overview of the Social Security Administration's (SSA) forecasting methods and contrasting those methods to microsimulation methods using a specific model, CORSIM. In the second part of the chapter, output from the microsimulation model is used to project aggregate contributions and revenues and to estimate internal rates of return for different lifetime-income groups of postwar Americans differentiated by birth cohort, sex, race, and educational attainment. The authors' findings suggest that postwar Americans can expect a low rate of return from Social Security (roughly 2 percent) and that the required adjustment (to taxes or benefits) will reduce that rate to about 1 percent.