A Bird’s Eye View of the Social Security Debate

Alicia H. Munnell

IB#25

Introduction

President Bush plans to use his political capital to “privatize” a portion of the Social Security program. Whether or not such a change is desirable and the extent to which it solves Social Security’s financing problems will dominate much of the policy agenda over the next few years. This Issue in Brief is intended to highlight the key points in the debate. First, it documents the magnitude of the Social Security financing problem. An enormous problem may justify a complete restructuring, while a more modest problem may call for marginal adjustments. Second, it clarifies that the privatization debate usually encompasses two separate issues – how to close Social Security’s financing gap and how to structure benefits. Third, it addresses the slightly esoteric, but quite important issue, of how to account for the higher expected returns earned on more risky assets. The conclusion, to the extent that one emerges from this overview, is that the issues are extremely complicated and that solving Social Security’s solvency problem requires serious decisions – rather than a silver bullet…