TSCL has been warning seniors about IOU problems of Social Security for more than ten years. At issue is how our government will find the money to redeem the IOUs held by the Social Security Trust Fund. Will our government borrow? Raise taxes? Or will benefits be cut?

In recent testimony before Congress, Douglas Holtz-Eakin, Director of the Congressional Budget Office, warned that surplus revenues to pay the benefits of current retirees will not be with us much longer. He testified that the Social Security surplus will start to diminish in 2009, and that by 2019 the cost will exceed tax income. To pay full benefits the Social Security system will have to rely on the interest and ultimately redeeming the government bonds held by the Trust Funds.

Thus TSCL is concerned that Congress would enact legislation to establish private accounts using the Social Security surplus when it is expected to disappear in only ten years. How would the accounts be funded then? With more IOUs?

According to Holtz-Eakin, once the Social Security Trust Funds are exhausted, the Social Security Administration will no longer have legal authority to pay full benefits. "As a result, it will have to reduce payments to beneficiaries to match the amount of revenue coming into the system each year. Although the exact size of that reduction is uncertain, benefits would probably have to be cut — both for current and new beneficiaries — by about 25% to match the system’s available revenue."

TSCL believes this is a crucial reason why Social Security taxes should not be used to fund private accounts. The amount of payroll taxes coming into the system directly determines the level of benefits the program can afford to pay to current retirees. Diverting even today's surplus payroll taxes to private accounts, without a mechanism to ensure the funding of benefits for today's retirees, would lead to huge deficits. Deficits will put ever-increasing pressure on other parts of the federal budget to cut Medicare, Medicaid, veteran’s benefits, and other services for seniors. In addition, economists warn that massive borrowing would be very damaging to the economy. Should the economy stagnate and unemployment soar, Social Security would receive far less in payroll taxes than current estimates assume.

"Without some form of financing, borrowing for private accounts is likely to mean higher out-of-pocket health care costs, COLA cuts or even worse benefit cuts for seniors down the road, " says Shannon Benton, Executive Director of TREA Senior Citizens League (TSCL).

TSCL remains opposed to private accounts, even those funded by surplus Social Security taxes, because they take money out of the system needed to pay benefits for current retirees. In our 2005 Advisor Senior Survey, some 69% said you oppose privatization or even partial privatization of Social Security. We urge you to continue to contact your Members of Congress and let them know that any measure to reform Social Security should be carefully designed to address the program's funding requirements. Otherwise Congress will likely be considering deeper cuts in just a few years.

Sources: "Options for Social Security," Statement of Douglas Holtz-Eakin, Director, Congressional Budget Office Before the Senate Committee on Finance, May 25, 2005.

September 2005