Building Automatic Solvency into U.S. Social Security

Published March 1, 2006

The Brookings Institution

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Although Social Security reform appears to be off of the national agenda for now, real funding problems remain for America’s popular retirement program that policymakers need to address. The payroll taxes that support Social Security’s “pay–as-you-go” system will begin to fall short of outlays in 2017 and will be sufficient to finance only 74 percent of scheduled annual benefits by 2041, when the Social Security trust fund is projected to be exhausted.

In recent years, both Germany and Sweden have been able to put in place innovative approaches to solving pressing financial crises in their pay-as-you-go pension systems. Sweden’s experience suggests that U.S. policymakers consider setting the retirement age administratively, as determined by up-to-date life span data. And Germany’s move to calculate retirement benefits partly on the basis of a “sustainability factor” is moderating the costs of demographic shifts which would otherwise push the system toward unaffordable levels of taxation.

Ideally, U.S. policymakers will reach a consensus on Social Security solvency reforms. Sweden and Germany have shown that it is possible and desirable to put in place provisions that can automatically self-correct underfunding of pay-as-you-go pension systems. The U.S. should put in place such provisions for Social Security, ensuring permanent solvency for the program.

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