Second term best for Social Security reform: the proposals from the president's first term have been vetted publicly and will be primed for debate in Congress, and it is important that Social Security reform receives the attention that is needed to place the program on sound financial footing for the future.

• Author: Shepler, Bob
• Position: Washington Insights

Social Security has often been referred to as the "third rail" of American politics--members of Congress who "touched it" or proposed changes to it, faced political death. However, the political tide is changing, as informed citizens look at the enormous potential financial burden of Social Security's future obligations--and realize that a President's second term holds the best opportunity for Social Security reform.

The 2004 Social Security Trustees Report finds that Social Security taxes collected will begin to fall short of outlays in 2018 and will be able to pay only 73 percent of benefits by the year 2043. The enormous unfunded liability of $3.7 trillion, created by the retirement of the Baby Boom generation, will put extreme pressure on the system. That, in turn, will ultimately lead to cuts in promised benefits, increased Social Security taxes, transfers from general revenue or allowing individuals to invest their payroll taxes individually.

Social Security's chief actuary states, "If benefits were reduced to meet the shortfall in revenue for the combined program, the reduction would need to be 27 percent, starting with the exhaustion of the Trust Fund in 2042, and would rise to 32 percent for 2078. Alternatively, if additional revenue were provided beginning in 2042, revenue equivalent to a payroll tax rate increase of about 3.1 percentage points (from 12.4 percent under current law to about 15.5 percent) would be needed for the year.

"The additional revenue for 2043 would be equivalent to a payroll tax rate increase of about 4.5 percentage points for the year. Thereafter, the amount of additional revenue needed would gradually rise, reaching an amount equivalent to an increase in the payroll tax rate of about 5.9 percentage points for 2078 (or about 50 percent higher than today's rate)."

One way to ease the burden on future generations is to allow individuals to invest all or portions of their payroll taxes in personal accounts. The Cato Institute, an independent think tank, has proposed that beginning in 2006, individuals born after 1950 would be able divert their half of the payroll tax (6.2 percent) into private accounts--but in doing so, would forgo any accrued Social Security benefit. The remaining 6.2 percent payroll tax would continue to fund Social Security and help pay for the transition costs of moving the system away from the unsustainable...