Social Security, Saving, and the Economy

Publication Date: May 2003

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

One issue that never seems far from the minds of policymakers is Social Security. At the heart of the issue is the large shortfall of projected revenues needed to meet the mounting costs of the system. For the moment, the amount of Social Security tax receipts exceeds the amount of benefits being paid out. The Social Security trustees estimate that, beginning in 2018, the amount of benefits being paid out will exceed tax collections. According to the trustees' best estimate, the trust fund will be exhausted in the year 2042.

Some have argued that because the Social Security trust fund is intended to meet rising future costs of the program, its surplus should not be counted as contributing to official measures of the budget surplus. With regard to current saving, however, it makes no difference whether the surplus is credited to the trust fund or simply seen as financing current federal government outlays (including Social Security benefits). Off-budget surpluses contribute to national saving in exactly the same way as onbudget surpluses do. The additional saving they represent adds to the national saving rate and allows current investment spending to be higher than it would otherwise be.

With respect to household saving for retirement, how much is "enough" may be a subjective matter. But, one standard might be whether or not accumulated wealth is sufficient to avoid a decline in living standards upon retirement. A number of studies have found, however, that Americans may not tend to save enough to avoid such a decline in their living standard.

Social Security may affect saving in several ways. It may reduce household saving as participants pay some of their Social Security contributions by reducing what they otherwise would have set aside. It reduces the risk associated with retirement planning and so may free participants to cut precautionary saving. It may, however, encourage additional saving by making it possible to retire earlier, thus giving participants a longer period of retirement to plan for. To the extent that Social Security involves a transfer of income from workers to retirees, it tends to reduce household saving by shifting resources from potentially high savers to those who save less.

Proposed reforms have different effects on saving. Those that would move toward a more fully funded system would be likely to increase national saving, investment, and the size of the economy in the future. Reforms that would partially "privatize" using individual accounts, might tend to reduce national saving, unless contributions to those accounts were mandatory. Those that invested Social Security funds in private sector assets would be unlikely to have any effect on national saving. This report will be updated as economic events warrant.