Alice in Wonderland… or Is It Plunderland? The Generational Implications of Social Security Financing Policy and New Proposals to Expand Benefits

Abstract

The U.S. Social Security pension system is not adequately financed to fully meet benefit obligations specified in current law beyond the early 2030s. This potential financing shortfall has been recognized for at least the past quarter century but policymakers have done nothing to address it. The system is largely financed on a pay-as-you-go basis so restoring financing balance requires that the taxes supporting the system be increased, the benefits provided under current law be reduced or some combination of the two. The delay in addressing the system’s financing imbalances has resulted in shifting of costs associated with the pensions from older to younger generations. The analysis here explains how this works and provides estimates of the cost shifting that has occurred due to the delays in financing reform. It assesses how recent proposals to address Social Security financing shortfalls shift costs to future generations and depart fundamentally from basic principles on which the system was originally based.

Keywords: Social Security, aging, demographics, pensions, generational equity

JEL Classification: H20, H22, H55, J18, J26, J30