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Volume 13 Issue 3 - May 2013

Trustee: Are We Seeing Shift in Policy Options for Social Security Financing?

We may be in the midst of a shift in thinking about how Social Security should be financed, according to Charles P. Blahous III, Public Trustee for the U.S. Social Security and Medicare Trust Funds. Blahous spoke to the MRRC Research Workshop via teleconference on Friday, April 19, 2013. "We are in a time of great transformation with Social Security policy options. The universe of likely policy options is changing in fundamental ways before our eyes," he said.

Franklin D. Roosevelt’s vision called for a separately funded Social Security system. However, Blahous believes that the chances are increasing that this financing philosophy may be abandoned within the next 10 to 20 years.

Substantial corrections to Social Security financing were made in 1977, but they didn’t fully correct imbalances. In 1983, President Reagan and Speaker of the House Tip O’Neill collaborated to pass Social Security reforms. Reforms included delaying the annual cost of living adjustment (COLA), and extending coverage to federal employees. In 1999, President Clinton proposed a transfer of surplus general revenue to the Social Security Trust Fund, which would have constituted a break with the history of self-financing. More recently, a payroll tax cut has set an important precedent by drawing from the general fund to make up for lost Social Security revenue.

Social Security faces an insolvency crisis in 2016. The Social Security system faces a great challenge because "we don’t have a political precedent for closing a shortfall of this magnitude," said Blahous. If we wish to preserve self-financing, increased tax revenues combined with benefit restraints will be needed, he argued. However, with each passing year, chances increase that we will not attain a solution that preserves Social Security’s self-financing character. "We are thus facing a fundamental transformation of how we think of Social Security and how we finance it," said Blahous.