PRESIDENT’S 

COMMISSION TO

STRENGTHEN 

SOCIAL SECURITY

INTERIM REPORT

AUGUST, 2001

CSS S
The President's Commission to Strengthen Social Security

Co-Chairs

Daniel Patrick Moynihan 

Richard Parsons 

Members

Sam Beard 

John F. Cogan 

Bill Frenzel 

Estelle James 

Robert L. Johnson 

Gwendolyn S. King 

Olivia S. Mitchell 

Gerald L. Parsky

Timothy J. Penny

Robert C. Pozen 

Mario Rodriguez 

Thomas R. Saving 

Fidel Vargas
Table of Contents

Preface: Bringing Social Security into the 21st Century . . . . . . . 2

Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Maintaining Our Commitment to Social Security. . . . . . . . . . . . . 8

The Demographic Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

The Consequences of Inaction . . . . . . . . . . . . . . . . . . . . . . . . . 15

An Opportunity to Improve Social Security for Vulnerable

Americans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

An Opportunity to Become a Nation of Owners and Savers . . . 29

Analytical Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

The Interim Report of the President’s Commission to Strengthen Social Security

1
Bringing Social Security into the 21st Century:

A Preface By the Co-Chairs

Social Security is the most important and most popular domestic program of the United States gove rn m e n t .

For millions of retirees, it serves either as the sole or the primary source of income, the mainstay of dignity

and independence. Millions of others look to it to sustain or supplement the retirement they hope to beg i n

within the next several years. Since its inception in the midst of the Great Depression, it has made a vital 

d i fference in the lives of generations of American families. 

The road, however, hasn’t always been smooth. Social Security has been beset by periodic fiscal crises, and

recently by public skepticism that could reasonably be termed a crisis of confidence. In establishing a

Commission to Strengthen Social Security, President Bush had both concerns in mind. 

The crisis of confidence is real. Many working adults do not believe that they will ever collect retirement

benefits from Social Security. Such a failure has never once happened in a program that dates well back

into the last century, and part of the Commission’s mandate is to restore public confidence.

Among the program’s fiscal crises, the most dangerous occurred in the early 1980s, when the pay-as-yougo system was approaching bankruptcy. A bipartisan National Commission on Social Security Reform

was created in 1981 to work out a solution. For all its good intentions, the commission could reach no

agreement for a year. It wasn’t until the prospect of default that minds became sufficiently concentrated. 

In early 1983, in the course of eleven days, a number of commission members together with White House

and Congressional leaders reached a comprehensive agreement that literally saved Social Security for the

decades that followed. 

Before long, the system was not only stabilized but running a substantial surplus. This will continue for

another 15 years, when the system will again begin experiencing annual cash shortfalls, compounded by

mounting demographic pressure. In brief, the problem is this: more and more of us are living healthier and

longer lives. At the same time, we’re having smaller families. Birth rates are now just over half what they

were during the peak of the baby boom. 

The relentless truth of ascending life expectancies and declining birth rates will put an intolerable squeeze

on the system that now exists. Consider the facts. In 1940, when benefits were first paid, there were more

than 40 workers per beneficiary. In 1960, there were five workers for every beneficiary. Now there are

slightly more than three. Before long there will be just two. This downward trend in the ratio of workers 

to beneficiaries, under the existing system, would require either painful tax increases, significant cuts in

benefits or other spending, or astronomical levels of borrowing.

It could be worse. There are European countries for which the United Nations projects a population decline

of more than 40 percent by mid-century. By contrast, our population will experience a measure of growth,

thanks not least to immigration. But the ratio of workers to beneficiaries will never again be anything like

that of the age in which Social Security was founded.

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The Interim Report of the President’s Commission to Strengthen Social Security
As powerful as the impact of demographics is, there are other factors at work that require improvements to

a system conceived in the first half of the last century. The stock market and personal investing are no

longer solely the prerogative of the rich and privileged. Due to a major extension of the opportunities for

higher education, the gradual reduction of the legal and social barriers to the economic advancement of

minorities and women, and an explosion of new businesses and start-up enterprises, traditional job roles

and life-long occupational patterns have been altered or swept away.

For our forebears, Social Security was a transforming innovation. For us, it’s a system devoid of options for

building a net worth that reflects the dynamism of the American economy or which facilitates investments

to the benefit of our children or heirs. Nowhere is this dearth of possibilities more glaring than among the

growing number of single-parent families, most of whom rely on Social Security as their only tool of

preparation for retirement.

At present, under the Supreme Court ruling in Flemming v. Nestor, workers and beneficiaries have no legal

ownership over their Social Security benefits. Instead, what they have is a political promise that can be

changed at any time, by any amount, for any reason. In any retirement system a lack of legal ownership is 

a source of insecurity. In one that is under-financed in the long run by over 25 percent, it is a serious 

problem.

The Commission came to work clear about its mission. Our job is to bring the system into the 21st century,

to make it more responsive to the extraordinary social and economic changes that continue to remake every

facet of our lives, and to ensure its fiscal strength and fiduciary soundness.

The charge that President Bush gave us is nonpartisan and nonpolitical: The promise of Social Security to

current and future generations of Americans must and will be kept. 

We believe the diversity of views represented on this Commission is critical to our ability to make an

objective analysis. Equally, we believe that all of the members are determined to do their very best to help

“promote the general welfare” of the American people and not to serve political ends. With these intentions

and principles in place, the Commission has reached several conclusions that are presented on the following pages. Here we emphasize three:

If we are to maintain a sound system of support for tomorrow’s retirees, all generations of

Americans must be encouraged to save and invest more;

The Social Security program, as it now stands, does nothing to promote individual saving or 

investment. Workers have little sense of proprietorship or a sense of what they are entitled to. Many

have lost confidence in ever receiving anything back;

The current system is financially unsustainable. Without reform, the promise of Social Security to 

future retirees cannot be met without eventual resort to benefit cuts, tax increases, or massive 

borrowing. The time to act is now.

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The Interim Report of the President’s Commission to Strengthen Social Security
4

The Interim Report of the President’s Commission to Strengthen Social Security

This report presents the facts and reasons behind our conclusions. It is not meant to please any one 

constituency or to provide a rationale for preconceived notions of what should be done. Its purpose is

twofold; to identify what has to be fixed in order to modernize a program conceived and designed for a 

different era and a different economy; and to preserve the spirit of intelligent innovation and concern for

the common good that created Social Security in the first place.

If the problems spelled out in this interim report become a topic of national debate and receive the public’s

focus and scrutiny, that in itself will be a positive step forward. The greatest threat is in taking the course

of least resistance, ignoring the challenge and doing nothing. 

We believe that the opportunity now exists to do more than analyze and debate. The moment has arrived

for a restructuring of the nation’s Social Security system that doesn’t merely postpone the day of reckoning

but guarantees adequate funding for future beneficiaries. If we do it right – and we have every confidence

that a bipartisan coalition can – Social Security may be funded by clearly earmarked money that cannot be

diverted to other purposes through the political process.

For the first time, the retirement program can become an active rather than a passive instrument of 

personal financial security. It can be a means of wealth accumulation and long-range investment, giving

families resources they never had before, and widening the circle of Americans fortunate enough to pass 

on the accumulated results of their investments and hard work. 

If we have the will, we have the means to reestablish equity, maintain benefits for current retirees, and

enable workers to acquire a measure of wealth in the course of their working lives. 

In our final report, the Commission will make specific suggestions for concrete steps toward the reform

and revitalization of Social Security. For now, we wish to reiterate our enthusiastic belief that we have an

historic opportunity to make Social Security more relevant, more equitable and more effective than ever

before. The ultimate beneficiary of our commitment to act promptly, impartially and decisively to resolve

what is both a fiscal crisis and a crisis of confidence will be the American people.

Daniel Patrick Moynihan Richard D. Parsons
Summary

Our Opportunity is Equal to Our Challenge

• Social Security has been one of the most successful government programs of the 20th Century.

• If we have the will, we have the means to reestablish equity, maintain benefits for current retirees, 

and enable workers to acquire a measure of wealth in the course of their working lives.

General Findings of the Commission

• To support tomorrow’s retirees, we must save and invest more.

• The existing Social Security program does not save or invest enough for the future. 

• To do nothing now is to implicitly advocate increasing taxes, cutting benefits, reducing other 

government spending, or borrowing on an unprecedented scale. 

The Current System is Not Designed to Cope with Demographic Changes

• The ratio of workers to beneficiaries will drop from 5-to-1 in 1960 to close to 2-to-1 within a 

generation.

Social Security’s Deficits Are Projected to Begin in 2016

• In 2016, the program’s benefit obligations will exceed its annual tax revenue. While the government will

continue to pay benefits, 2016 is the beginning of a long-term financing problem for the government.

Faster Economic Growth Will Not Save the Existing System

• Under the Trustees’ faster-growth estimates, permanent cash deficits would be delayed by only one year,

to 2017. 

• Even if every economic and demographic variable were changed to reduce costs, permanent deficits 

would begin in 2020.

Building up a Social Security Trust Fund Will Not Change Tough Choices

• The report cites several sources, including the Social Security Public Trustees, the Congressional 

Budget Office, the General Accounting Office, the Congressional Research Service, and the Clinton 

Administration FY2000 Budget, each to the effect that changing the Trust Fund’s balance does not alter 

the tough choices facing taxpayers.

How Would Households Be Affected if Shortfalls Were Met By Raising Taxes?

• If tomorrow’s shortfalls were faced today, the following additional taxes would be required from a 

two-earner couple with $50,000 in income:

Shortfall in 2020: $860 more in annual taxes

Shortfall in 2030: $2,100 more in annual taxes

How Would Beneficiaries be Affected if Shortfalls Were Met By 

Cutting Benefits?

• If tomorrow’s shortfalls were faced today, a medium wage earner and spouse retiring at age 65 would 

see their benefits reduced by the following amounts :

Shortfall in 2020: $2,227 less in annual benefits

Shortfall in 2030: $4,605 less in annual benefits

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The Interim Report of the President’s Commission to Strengthen Social Security
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The Interim Report of the President’s Commission to Strengthen Social Security

What if Shortfalls Were Met By Cutting Other Spending? 

• By 2020, required cuts would equal the combined size of Head Start, WIC, the Departments of 

Education, Interior and Commerce, and the EPA. By 2025, the combined cuts would equal all of the 

above plus NASA and the Department of Veterans Affairs.

What if Shortfalls Were Met by Adding to Public Debt?

• The total government borrowing required to finance Social Security’s cash shortfalls would equal $7 

trillion by 2040, $14 trillion by 2050, and $47 trillion by 2075 (in 2001 dollars). This borrowing would 

continue, and increase, for as long as Social Security was left unreformed.

An Opportunity to Improve Social Security for Women

• Women are more likely than men to suffer poverty in old age.

• Poverty rates are highest for widowed, divorced and never-married women.

• Women receive a higher percentage of their retirement income from Social Security than do men, and 

thus are particularly threatened by the benefit reductions that would occur in the absence of reform (a 

27 percent reduction in 2038).

• Social Security contains many inequities that hurt women who work. A low-income two-earner couple 

experiences a lower rate of return than a high-income one-earner couple. 

An Opportunity to Improve Social Security for Vulnerable Americans

• Despite popular perceptions, recent studies show that Social Security retirement benefits provide little

systematic redistribution from rich to poor on a lifetime basis.

• Recent academic research finds that, as a result of mortality differences, African Americans receive

nearly $21,000 less on a lifetime basis from Social Security’s retirement program than whites with 

similar income and marital status.

• Because they are younger than the general population, in 1998 Hispanic Americans paid $33 billion in 

OASDI payroll taxes but received only $18 billion in benefits. 

An Opportunity to Improve Social Security for Younger Americans

• Under the existing system, Social Security will provide a bad deal for today’s young workers, as seen in 

the charts on the following page. These charts show rates of return plummeting for individuals entering 

the workforce, who would have to live well past their expected lifetimes to receive back the value of 

their contributions plus interest.

An Opportunity to Become A Nation of Owners and Savers

• The median U.S. household owned only $17,400 worth of financial assets in 1998, including retirement 

accounts. For African American and Hispanic households, the numbers were only $3,060 and $1,200 

respectively.

• For most American households, Social Security taxes represent their largest tax payment as well as their 

largest contribution to retirement preparation. If savings and investment opportunities are not created 

within Social Security, these Americans may lose their best opportunity to acquire financial assets.
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The Interim Report of the President’s Commission to Strengthen Social Security

Birth 

Year

1970

1980

1990

2000

Source: May 27, 2001 calculation by the Social Security Office of the Actuary

Single Male

(Medium

wages)

1.13

0.91

0.88

0.86

Single Female

(Medium

wages)

1.59

1.36

1.29

1.25

Single Earner

Couple

(Medium wages)

3.42

3.31

3.14

3.02

Two-Earner

Couple (Medium

/Low wages)

2.24

2.08

1.97

1.88

Real Rates of Return Falling for All Retirees

(Assumes No Change in Law, Retirement at Age 65)

Year of 

Birth

1875

1895

1915

1936

1945

1955

1965

Age an average earner gets

back taxes paid into the

retirement portion of Social

Security

65.2

66.1

67.8

81.8

85.2

89.7

91.9

Source: Congressional Research Service, “Social Security: The Relationship of Taxes and

Benefits for Past, Present, and Future Retirees,” June 22, 2001; updated via telephone conversation with author. Under the intermediate assumptions of the 2001 Trustees Report and taking into

account benefit increases and continued accrual of interest after retirement but not the taxation of

benefits. The retirees are assumed to begin work at age 22 and retire in January of the year in

which they turn 65. Assumes contributions earn interest equal to the long-term government bond

rate. 

Total Life Expectancy for

Individual Reaching age 65

MALE

77.7

78.2

79.7

81.3

81.9

82.5

83.0

FEMALE

79.7

82.4

83.9

84.6

85.0

85.6

86.1

What age must you reach to get back what you’ve paid in?
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The Interim Report of the President’s Commission to Strengthen Social Security

Maintaining Our Commitment to Social Security

Social Security affects the life of nearly every American through its provision of retirement, survivors and

disability benefits. Today Social Security faces serious challenges, but it must always honor its founding

purpose of protecting the elderly from want and bringing dignity to retirement.

Social Security was created in a world different from our own. It was a world of large families and short

life spans, a world in which markets were perceived to have failed and individual choices were fewer.

Social Security effectively responded to the needs of that world. 

The world is different today. Americans enjoy the blessing of long life: by the year 2050 more than 

one-fifth of the population will be over age 65. Americans have chosen to have smaller families: birth rates

today are just over half what they were during the peak of the Baby Boom. These two facts put a severe

strain on our system of retirement security. In 1960, there were over five workers for every beneficiary.

Today there are three and a half workers per beneficiary, and by 2030 there will be just over two. Under the

existing system, this downward trend in the ratio of workers to beneficiaries will require the government 

to raise taxes, cut benefits, cut other government spending, or borrow the necessary funds. Under such 

circumstances, rates of return for workers – already low – will fall further, and most beneficiaries would

have to live well past the average life expectancy simply to get back what they had paid into the system

plus interest.

The creators of Social Security were not content to do nothing in the face of an unacceptable status quo.

We who inherit their achievement must live up to their example. 

Though the demographic changes since 1935 will soon strain our retirement system, other changes offer

opportunities to improve it. We better understand the power of markets than Americans did during the

shock of the Great Depression. We feel more urgently the importance of extending the benefits of personal

asset ownership. And we are more strongly committed to equitable treatment of all our nation’s people,

regardless of race, income or gender.

These advances have sparked a new need for a retirement system that includes saving and ownership.

Social Security must adapt to today’s population of young people, the self-employed, minorities and

women. And it must serve this new society as well as the existing system served a past society in which

men were often the sole earners in the family.

Social Security today offers workers and their dependents a promise that will vary in value depending 

on the length of that worker’s life and the policies of Congresses decades in the future. Simple arithmetic

dictates that these promises can be honored in full only by imposing substantially higher costs on future

generations of workers. 
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The Interim Report of the President’s Commission to Strengthen Social Security

The way to alleviate this burden is to provide opportunities for individuals to save more for their retirement.

The more wealth individuals can accumulate, the less they will have to rely on taxes imposed on tomorr ow ’s

wo r kers. Just as important, higher saving rates increase the capital stock and enhance wo r ker productiv i t y. A

more productive economy can more easily support larger populations of beneficiaries without ove r bu r d e n i n g

wo r kers or their families. Outlining a strategy to boost personal and national saving is one of the most 

i m p o rtant tasks of this Commission.

President Bush directed this Commission to review Social Security and recommend reforms to strengthen

and sustain it. Thus far, we have reached the following conclusions:

If we are to support tomorrow’s retirees without overburdening tomorrow’s workers, this generation 

of Americans must save and invest more.

The existing Social Security program does not save or invest for the future. It was not designed to 

facilitate saving, and the political process cannot be relied upon to save on behalf of American 

families. 

Under the existing system, Americans will soon face inescapable choices: cut Social Security 

benefits, raise taxes, cut other government spending, or borrow on an unprecedented scale.

To do nothing is implicitly equivalent to advocacy of one or more of those options.

This report presents the evidence on which these conclusions rest – and the case for acting now, while

there is adequate time to prepare, rather than waiting for the inevitable crisis. We must understand the

nature and dimension of the challenge that we face. One aspect of that challenge is clear: Inaction is not 

a solution.
The Demographic Challenge

Many people believe that Social Security is a national pension 

fund in which workers make contributions to an investment 

account called the Trust Fund. When a worker retires, dies or

becomes disabled, they believe that his contributions, plus 

interest, are taken out of an account to pay benefits. 

The reality is different. Our Social Security system is managed 

as an income transfer program. This means that every penny of 

benefits paid each year comes from taxes collected or money

borrowed from the public in that year. Under such a system, 

higher taxes today do not reduce tax burdens in the future.

The present value of Social Security’s currently accrued obligations exceeds $12 trillion. This means that if

Social Security were a funded pension plan, it would need to hold over $12 trillion worth of assets to pay

currently accrued benefit commitments.1

Today’s beneficiaries are not living off financial assets accumulated in the past. Today’s workers

are not accumulating financial assets for the future. Workers invest their payroll taxes not in financial assets but in the willingness of future politicians to tax future workers to pay future benefits.

The Importance of the Worker-to-Beneficiary Ratio

As an income transfer system,

Social Security works best

with a high ratio of workers to

beneficiaries. When the

United States had a rapidly

growing workforce supporting

a small elderly population,

Social Security seemed sustainable. But when fewer new

workers are paying into Social

Security and more new beneficiaries are collecting from it,

the burden placed on individual workers must inevitably

rise. 

That’s exactly what has been

happening. In 1960 there were

more than five workers paying

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The Interim Report of the President’s Commission to Strengthen Social Security

250,000

200,000

150,000

100,000

50,000

0

Source: 2001 OASDI Trustees Report

Taxpaying Workers

Social Security Beneficiaries

The retiree population will increase faster than the workforce, leading 

to declining worker-beneficiary ratios.

1 This assumes that assets would be invested at the long-term government bond rate.

Income Transfer system:

Each generation supports 

the generation that came 

before it.

Funded system: Each

generation saves and invests 

for its own retirement.
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The Interim Report of the President’s Commission to Strengthen Social Security

into Social Security for every individual collecting benefits. Today, demographic changes have reduced the

worker-to-beneficiary ratio to 3.4-to-1. By 2050 it will be just 2-to-1. In other words, a future worker will

bear a relative Social Security burden two-and-a-half times as large as a worker in 1960. 

Problems Continue After the Baby Boomers Retire

Beginning in 2008 the first

Baby Boomers will be eligible to take early retirement. The following two

decades will see a rapid

increase in the cost of

delivering Social Security

benefits, from 10.9 percent

of taxable earnings in

2008 to 17.4 percent of

earnings in 2031, when the

final Boomers reach

Normal Retirement Age. 

Baby Boomer retirements

mark the beginning of

Social Security’s financing

problems, but those 

problems will continue –

and grow worse – even after the Boomers are gone. In 2025, for instance, when the youngest Baby Boomer

will be 60, the worker-to-beneficiary ratio will be 2.3-to-1. By 2050, when the youngest Boomer will be 85

and most of them will have passed on, the worker-to-beneficiary ratio will have further declined to just two

workers per beneficiary.

Stop-gap measures to keep Social Security solvent would not be effective because there is no relief from

the demographic pressures bearing on the program. Baby Boomer retirements raise Social Security costs to

a new and higher plateau from which there is no long-term relief under the current system.

Source: 2001 OASDI Trustees Report

50

45

40

35

30

25

Baby Boomer Retirements Raise Costs to Permanently Higher Level
Lagging Birthrates Mean Fewer New Workers

The Baby Boom generation born from the end of World War II to 1964 was originally a blessing to Social

Security’s finances. Returning veterans started new families by the millions, raising the total U.S. fertility

rate from 2.2 children per woman in 1940 to 3.2 in 1947 and on to a high of 3.7 in 1957. For Social

Security this meant millions of new workers paying taxes into the system. 

But the Baby Boom didn’t last. Following the Boom, birth rates fell below their pre-Boom level. By the

mid-1970s, for instance, fertility averaged just 1.8 children per woman, half the level of the late 1950s.

And while fertility rates have risen somewhat in recent years – they now stand at around two children per

woman – Social Security’s Trustees expect these historically low rates to continue indefinitely into the

future. 

The result is that over the next 75 years the U.S. working-age population is projected to grow at a rate just

one-third as fast as during the 1970s. And this slowly growing work force will be expected to support a

much more rapidly growing population of beneficiaries. 

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The Interim Report of the President’s Commission to Strengthen Social Security
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The Interim Report of the President’s Commission to Strengthen Social Security

Some Basic Social Security Math

For all its complexity, Social Security’s underlying problems are governed by some basic math.

Example: Today’s average Social Security benefit is equal to around 36 percent of the average

worker’s wage. Since there are currently 3.4 workers per beneficiary, the cost to each worker to

support today’s beneficiaries is around 10.5 percent of his earnings. (36/3.4 = 10.5) Since today’s

payroll tax rate is set at 12.4 percent, Social Security currently runs a surplus.

What happens if the ratio of workers to beneficiaries falls? 

If the worker-to-beneficiary ratio falls, then each worker bears the burden of more retirees. 

Example: If instead of 3.4 workers per beneficiary there are just 2, then the cost to each worker

rises from 10.5 percent to around 18 percent of earnings. (36/2 = 18) 

What level of benefits is affordable? 

The same equation, recast to isolate the level of benefits, tells us what level of benefits a given

payroll tax rate can support:

Payroll tax rate x Worker-to-beneficiary ratio = Affordable benefits as percent of average wage

Example: With a 3.4-to-1 worker-to-beneficiary ratio, a 10.5 percent payroll tax rate can pay

benefits equal to around 36 percent of the average wage (3.4 x 10.5 = 36). But when the 

worker-to-beneficiary ratio falls to 2-to-1, the same 10.5 percent tax rate can provide benefits

equal to just 21 percent of average earnings.

What is “wage indexing” and what is its relationship to current projections?

Initial Social Security benefit levels are currently indexed to the growth in national wage levels.

Consequently, even if there were no demographic problem, Social Security costs would grow

almost as fast as the economy as a whole. Faster economic growth means more tax contributions

in the short term, and higher benefit obligations in the long term. Though this faster growth helps,

it does far less than many people believe. Mostly it creates the illusion of improvement because

short-term revenue gains postpone the projected date of Trust Fund depletion, whereas increased

costs would occur mostly after the projected depletion date.

Average benefits as percent of average taxable wage = Program cost as percent of average wage

Worker-to-beneficiary ratio
Increased Life Expectancies Mean More Beneficiaries

Americans of all ages, races and incomes are living

longer than ever. This is good news for them. It is

not such good news for Social Security. Increased

life expectancies mean more workers will survive

to collect benefits and will collect for more years

than in the past. 

In 1940, life expectancy for newborns was just 69

for men and 76 for women. Life expectancy for

those at age 65 was 13 additional years for men

and 15 for women.

By 2050, life expectancy for newborns is expected

to rise to 83 for men and 88 for women, while life

expectancy at 65 will rise to 19 years for men and

22 for women. 

Moreover, the “oldest

old” age 85 and over will

more than double as a

share of the total population, from 1.5 percent

today to 3.7 percent of the

total population in 2050.

The oldest old are already

the fastest growing elderly age group, increasing

by 274 percent between

1960 and 1994, compared

to 100 percent for the elderly population in general

and 45 percent for the

U.S. population as a

whole. By 2050 more

than 14 million

Americans will be over

the age of 85.2

O ver time, increased life

expectancies and lower birthrates contribute to a gradual “aging” of the population. While in the 1940s just 7

percent of the population was age 65 or older, by the 2050s that proportion will rise to more than 20 percent.

M o r e ove r, Americans will spend more years in retirement than ever before. 

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The Interim Report of the President’s Commission to Strengthen Social Security

2 Source: Social Security Office of the Actuary

25

20

15

10

5

0

1 9 5 0 s 1 9 7 0 s 1 9 9 0 s 2 0 1 0 s 2 0 3 0 s 2 0 5 0 s 2 0 7 0 s

Source: 2001 OASDI Trustees Report

As the population ages, the percent of Americans age 65 

and older will steadily grow

22.4

21.8

20.1 20.3 20.9

17.7

14

12.5 12.4

11.7

10.3 9.3 8.5

More Americans survive to age 65

and live longer in retirement

● Of the generation reaching age 65 in 1940, 

only 40 percent of males survived to age 65 

and those who did lived for an average of 12.7 

additional years. 

● Of the generation reaching age 65 in 2000 

(born in 1935), 69 percent of males lived to age 

65 and those who did are expected to survive an 

average of 16.2 years. 

● Of the generation reaching age 65 in 2050, 84 

percent of males are expected to live to age 65 

and those who do are expected to survive an 

average of 19.1 years.
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The Interim Report of the President’s Commission to Strengthen Social Security

The Consequences of Inaction

The Executive Order establishing the President’s Commission to Strengthen Social Security requires that an

interim report be submitted to the President describing “the challenges facing the Social Security system.”

The fundamental challenge facing Social Security can be described succinctly: Inaction will result in

either significant tax increases, benefit reductions, cuts in other government programs, or increases in

the national debt.

Social Security Cash Deficits A re Projected to Begin in 2016

Social Security’s primary source of revenue is a 12.4 percent payroll tax applied to the covered earnings 

of wage earners. Social Security also receives money from the taxation of Social Security benefits. 

In 2016, under current projections, Social Security will collect less in tax revenues than it has committed 

to pay out in benefits. 

When that happens, the Social Security Trust Fund will still show a positive balance. But the Trust Fund

holds not accumulated reserves of wealth but debt obligations that future taxpayers will be asked to

redeem. Whether the balance in the Trust Fund is $5 trillion or zero, to make the current system sustainable the nation faces identical choices: either raise taxes, reduce benefits, decrease other government

spending, or increase borrowing from the public.3

When Social Security deficits begin in 2016, annual cash shortfalls will be relatively small and could 

possibly be financed through surpluses in the rest of the government’s budget. But these annual cash

deficits will eventually grow very large: $194 billion in 2025, $271 billion in 2030, and $318 billion in

2035 (in 2001 dollars).4 The cost of paying benefits will rise from 10.5 percent of taxable earnings today to

almost 18 percent in 2035. The effects of these pressures on beneficiaries and taxpayers will be shown on

subsequent pages. 

The year 2016 may seem a long way off, but it is not. For a person who is 50 years old today, Social

Security will begin experiencing annual cash deficits just when he or she reaches retirement age.

3 Adding to the public debt means that the public debt would be greater than if there were no Social Security cash shortfall. If the government maintained a 

deficit, this would mean that deficits and debt would be increased. During a time of surplus, this would mean that surpluses would be reduced. It is difficult 

to predict future government budget policy and thus not possible to say which situation would exist when Social Security faces cash deficits. 

4 In current dollars, Social Security’s cash flow deficits will be $419 billion in 2025, $687 billion in 2030 and $948 billion in 2035. 
16

The Interim Report of the President’s Commission to Strengthen Social Security

Will Faster Economic Growth Avert the Problem? 

No. This report relies on the Social Security Trustees’ Intermediate Assumptions for economic and

demographic factors affecting the current system. Some argue that the Trustees’economic forecasts

are pessimistic and that faster economic growth would restore Social Security to financial health.

But retirees’ initial Social Security benefits are indexed to the growth of wages. Hence, while faster

economic growth will raise wages and payroll tax receipts, it will also increase the benefits that

Social Security promises to pay.

The principal boost to Social Security’s finances from faster economic growth comes from the delay

between higher taxes being received and higher benefits being promised. Even if wages grow at

more than double the rate projected, Social Security will still become insolvent. Faster economic

growth is desirable both for workers and for retirees because it enables a higher standard of living 

for all. But it will not solve Social Security’s financial problems. 

In addition to wage growth, the Trustees estimate how variations in fertility, mortality, immigration,

inflation, interest rates, and incidence of disability would affect Social Security’s finances.

Substituting the Trustees’ Low-Cost Assumption for any single variable will not change the date 

of cash flow deficits by more than one year.

Even if every single economic and demographic variable were simultaneously adjusted to reduce

projected costs – that is, if the economy grows faster, wage growth rises, unemployment falls, 

interest rates increase, life expectancies fall, fertility rates increase, more immigrants pay taxes into

the system, and fewer workers become disabled – Social Security would experience its last cash 

flow surplus in 2019, just four years later than currently projected.
17

The Interim Report of the President’s Commission to Strengthen Social Security

Why the Social Security Trust Fund Doesn’t

Alleviate the Problem

Social Security will begin

running annual cash

deficits in 2016. However,

the program will be able

to redeem government

bonds in its Trust Fund to

pay full benefits until

2038.5 Does this mean

there is nothing to worry

about until 2038? Not at

all. While these bonds are

an asset to Social

Security, they are a 

liability to the federal

Treasury. Revenue must

be raised from taxpayers

to redeem these bonds.

Social Security has run

payroll tax surpluses since the mid-1980s and will continue to do so until 2016. But these past 

surpluses were “lent” to the Treasury to cover deficits in the rest of the federal budget. These “loans” to 

the Treasury were not considered part of the debt held by the public, although they were in truth a public

obligation.

Bonds were credited to the Trust Fund over time, resulting in a Fund balance now exceeding $1 trillion.

The problem is that when Social Security begins running cash deficits in 2016, the nation will face very

difficult choices. 

This situation arose because past payroll taxes were not truly saved, but rather were used to finance other

government spending. As a result, future repayment of Trust Fund bonds will not be any less difficult. The

Clinton administration’s fiscal year 2000 budget made the point succinctly:

“These [Trust Fund] balances are available to finance future benefit payments and other Trust

Fund expenditures – but only in a bookkeeping sense. ... They do not consist of real economic

assets that can be drawn down in the future to fund benefits. Instead, they are claims on the

Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public,

or reducing benefits or other expenditures. The existence of large Trust Fund balances, therefore,

does not, by itself, have any impact on the Government’s ability to pay benefits.”6

20

18

16

14

12

10

Source: 2001 OASDI Trustees Report

Income Rate

Cost Rate

Beginning in 2016 Social Security’s Costs Will Exceed Its Tax Revenue

5 There are two Trust Funds – one for Old Age and Survivors Insurance and a second for Disability Insurance. In practice, however, they are treated 

essentially as a single entity.

6 FY2000 Budget, Analytic Perspectives, p. 337.
18

The Interim Report of the President’s Commission to Strengthen Social Security

The government could keep Social Security technically solvent forever simply by issuing new bonds to the

fund. Alternatively, Social Security could be made technically solvent by requiring that a higher rate of

interest be paid by the Treasury to the Trust Fund. Regardless, the need to raise taxes, cut spending or 

borrow would remain exactly the same. While the bonds in the Social Security Trust Fund will be honored,

what is important economically is not the amount of bonds in the Fund but the resources backing those

bonds. And the resources backing these bonds are quite simply the power of the government to tax 

and borrow from the public.

At present the Social Security Trust Fund holds government bonds worth about $1 trillion. By 2016 this

will grow to over $3.2 trillion (in today’s dollars). While these bonds are assets of the Social Security 

system to support benefit payments, they are real debts to the rest of the government. That debt is the 

same size as the total publicly held national debt today. It is 60 percent larger than the entire federal budget

today. So it is hardly a trivial amount. These Trust Fund bonds are claims on real resources, and when

Social Security begins to redeem these bonds in 2016 the Treasury will have to find those real resources. 

With or without a Trust Fund, the federal government will need extra resources after 2016. And with or

without a Trust Fund, the steps required to obtain that money remain difficult: raise taxes, cut government

spending, or add to the national debt. 

Budgetary Implications of the “Lock-Box”

Many in both political parties advocate using the so-called “lock-box” to save Social Security surpluses.

The lock-box is not a literal place where Social Security surpluses would be stored, but a budgetary commitment to use such surpluses only for repayment of the public debt – in other words, a pledge not to

spend the money. Successful enforcement of the lock-box would preserve the surplus for national saving

and reduce government debt service costs, making it easier to meet Social Security’s future obligations

than if the money had been spent.

Even if the “lock-box” were successful at preventing so-called raids on Social Security, however, it is not a

long-term solution to the program’s financing problems. First, whatever we do in the future, it does not

change the fact that past Social Security surpluses were not saved. Even if the “lock-box” were diligently

enforced from this point forward, it would not eliminate the government’s long-term fiscal problem.

Second, there is a limit to the amount of public debt available to be paid down by Social Security 

surpluses. If the available public debt were retired, the only way the government could advance fund 

future benefits would be to invest in private securities. Choosing the “lock-box” approach would not 

eliminate the need for private investment but would simply represent a choice to have the government,

rather than individuals, purchase private securities.
19

The Interim Report of the President’s Commission to Strengthen Social Security

Non-Partisan Experts Agree: Social Security 

Trust Fund Not an Asset to the Government

Social Security Public Trustees: “Rather than providing net revenue to the Treasury, after 2016 the

combined trust funds will require rapidly growing infusions of revenues from the Treasury to pay

benefits projected under current law. It is at this point – and not at the later dates when trust fund

assets (i.e., the securities being redeemed) are technically exhausted – that Social Security and

Medicare will begin to be in direct competition with other Federal programs for the resources of the

Treasury...” (Thomas R. Saving of Texas A&M University and John L. Palmer of Syracuse University,

Public Trustees to the Social Security and Medicare programs.)

Congressional Budget Office: “Although there is no money in the Treasury to pay for future 

obligations, the obligations to people eligible for Social Security benefits are real. And most 

important, those obligations are a direct result of federal law, not a consequence of whatever may or

may not be credited to the Trust Funds. In particular, the size of the balances in the Social Security

Trust Funds – be it $2 trillion, $10 trillion, or zero – does not affect the obligations that the federal

government has to the program’s beneficiaries. Nor does it affect the government’s ability to pay those

benefits.” (CBO Director Dan L. Crippen and Deputy Director Barry B. Anderson, testimony before

the House Ways and Means Committee, Feb. 23, 1999)

General Accounting Office (GAO): Social Security’s “Trust Funds are not like private Trust Funds.

They are simply budget accounts used to record receipts and expenditures earmarked for specific 

purposes. A private Trust Fund can set aside money for the future by increasing its assets. However,

under current law, when the Trust Funds’ receipts exceed costs, they are invested in Treasury securities

and used to meet current cash needs of the government. These securities are an asset to the Trust Fund,

but they are a claim on the Treasury. Any increase in assets to the Trust Funds is an equal increase in

claims on the Treasury.” (David M. Walker, Comptroller General of the United States, “Social Security

And Surpluses: GAO’s Perspective on the President’s Proposals,” Feb. 23, 1999)

Congressional Research Service: “What often confuses people [about the Trust Fund] is that they see

these securities as assets for the government. When an individual buys a government bond, he or she

has established a financial claim against the government. When the government issues a security to

one of its own accounts, it hasnt purchased anything or established a claim against some other person

or entity. It is simply creating an IOU from one of its accounts to another. Hence, the building up of

federal securities in federal Trust Funds – like those of Social Security – is not a means in and of itself

for the government to accumulate assets. It certainly establishes claims against the government for the

Social Security system, but the Social Security system is part of the government. Those claims are not

resources that the government has at its disposal to pay future Social Security benefits... The key point

is that the Trust Funds themselves do not hold financial resources to pay benefits – rather, they

provide authority for the Treasury Department to use whatever money it has on hand to pay them.”

(David Stuart Koitz, “Social Security Taxes: Where Do Surplus Taxes Go and How Are They Used?”

Congressional Research Service, April 29, 1998 )
20

The Interim Report of the President’s Commission to Strengthen Social Security

The Inescapable Choices Under the Status Quo

Under the current Social Security system, individuals do not withdraw benefits from savings accounts 

held in their names. Benefits are paid from only one ultimate source: tax dollars. If the current system’s

financing is left in place, future workers and beneficiaries will experience one or more of the following: 

1) large tax increases, 2) significant benefit cuts, 3) widespread reductions in other government programs,

or 4) unprecedented accumulations of public debt. The only uncertainty is which steps will happen and

which groups will be hit the hardest. 

But these steps, however undesirable, cannot solve the current system’s problems permanently. Cash

deficits in one year will be followed by larger shortfalls the next year, and larger again in every year 

thereafter. Social Security needs structural improvement if it is to cope with the realities of an aging 

society. The four choices:

1) Raise Taxes

One option facing the nation is

to maintain full benefit promises by raising taxes. While it is

impossible to predict what

taxes a future Congress might

choose to raise, the chart to the

right hows the effect of tax

increases needed in future

years if applied proportionately

to wages currently subject to

the Social Security payroll tax.

2) Cut Benefits

Another option is to cut 

benefits to the level that could

be supported out of currently

legislated Social Security tax

revenues. In the long run, this

would produce benefits more

than one-quarter below the

levels currently promised by

Social Security’s benefit 

formula. We illustrate with a

medium-earner and spouse

who retired this year at 65

receiving, under current 

benefit rules, a total annual

benefit of $18,945. If benefit

cuts required to balance the system in the future were applied proportionately to this couple today, they

would receive thousands of dollars less annually from Social Security.

If the percentage

shortfall in the following 

year existed today:

2020

2030

2040

2050

A couple’s

taxes could 

increase by:

$860

$2,100

$2,275

$2,295

Tax increase 

(in percent of 

payroll taxes)

14%

34%

37%

37%

Explanation: this table applies the percentage tax increases in future years to a couple 

earning $50,000 today.

How much would taxes increase?

If the percentage shortfall 

in the following year 

existed today:

2020

2030

2040

2050

A couple’s annual benefits

could be reduced by:

$2,227

$4,605

$4,867

$4,888

Benefit reduction

in percent

12%

24%

26%

26%

Explanation: this table applies the percentage benefit reductions in future years to a retired

couple receiving $18,945 annually in benefits today.

How much would benefits be cut?
21

The Interim Report of the President’s Commission to Strengthen Social Security

3) Cut Other Government Spending

A third option to address Social Security’s cash flow probl e m s

would be to cut other gove rnment spending. By freeing up

enough on-budget revenues we could redeem Social Security

Trust Fund debt without raising taxes, cutting benefits or 

b o rr owing. But how much would other spending have to be cut?

In 2016, the first year in which Social Security is projected to

run cash deficits, the program faces a shortfall of $17 billion

(in today’s dollars). Assuming that federal spending maintained

its present size relative to the rest of the economy, making up

Social Security’s 2016 deficit by cutting other spending would

require eliminating programs the combined size of Head Start and the Special Supplemental Nutrition

Program for Women, Infants and Children (WIC). 

By 2020 Social Security deficits will have grown to $99.1 billion, requiring cuts – in addition to those

already listed – equivalent to eliminating the Departments of Education, Interior and Commerce, as well as

the Environmental Protection Agency.

By 2025, Social Security deficits will reach $194.3 billion in today’s dollars, requiring cuts equivalent to

all the programs mentioned above plus NASA and the Department of Veterans Affairs. The $270.8 billion

shortfall in 2030 would require eliminating the Departments of Energy and Housing and Urban

Development (HUD) as well. By 2035, when Social Security faces a $317.6 billion annual shortfall, the

Department of Justice and the

National Science Foundation

would also have to be 

eliminated. 

4) Increase Public Deb t

The final option available to

the country in 2016 is to issue

additional public debt to meet

Social Security cash-flow

shortfalls without raising taxes,

cutting benefits or reducing

other federal spending. While

issuing public debt can shift

the burden over time, it cannot

reduce the burden’s overall

size. All borrowing must 

ultimately be paid back via 

tax increases or reductions in 

government spending.

2016

2020

2025

2030

2035

$17.4 billion

$99.3 billion

$194.3 billion

$270.8 billion

$317.6 billion

Source: 2001 OASDI Trustees Report

Annual Social Security cash 

shortfalls, in 2001 dollars

50

45

40

35

30

25

20

15

10

5

0

Source: Based on 2001 OASDI Trustees

Federal Borrowing to Meet Social Security Cash Shortfalls 

Would Bring Trillions in Additional Debt
22

The Interim Report of the President’s Commission to Strengthen Social Security

The previous chart shows the additional debt required to finance cash shortfalls that Social Security will

begin to experience in 2016. This debt would accumulate to more than $7 trillion (in 2001 dollars) by

2040, $14 trillion by 2050, and over $47 trillion by 2075. This additional public debt would be larger than

the national debt at the end of World War II, relative to the economy.

Borrowing to invest in long-term structural improvements might be justified, if that borrowing would generate the ability to repay. But borrowing could never be repaid under the existing system. This additional

public debt would continue to rise indefinitely.

Social Security and Medicare Will Absorb 

A Growing Share of the Nation’s Resources

One way to understand the consequences of inaction on Social Security reform is simply to assume

that tax revenues are raised as necessary to fulfill currently legislated benefit promises.

Social Security currently consumes 4.2 percent of the nation’s gross domestic product – almost

$2,600 for every working-age American. If additional revenues were provided to Social Security as

needed, by 2075 system costs will rise to 6.7 percent of GDP – a 60 percent increase.

Medicare will also command an increasing share of the nation’s resources, leaving less room in the

budget to absorb Social Security’s rising costs. While Medicare costs 2.3 percent of GDP today,

these costs are projected to escalate to 8.5 percent of GDP by 2075. Combined, Social Security and

Medicare will absorb more than 15 percent of the nation’s gross domestic product unless these programs are made sustainable. For comparison, all personal income taxes paid to the federal government today total approximately 9 percent of GDP.

This outcome would be a direct consequence of a failure to improve the basic structure of these

programs. Only through meaningful, structural improvements can Social Security and Medicare be

placed on a sustainable path.
23

The Interim Report of the President’s Commission to Strengthen Social Security

An Opportunity to Improve Social Security for

Vulnerable Americans

Social Security redistributes income among households based on differences in such factors as marital 

status, income, length of life and year of birth. For previous generations of beneficiaries, who were on 

the receiving end of income transfers, the program effectively lifted many seniors out of poverty simply

because most participants received substantially more than they put in. Today, when this is true for only

some of those entering retirement, Social Security’s haphazard distribution of benefits is becoming more

apparent. When Social Security begins to experience cash deficits, the effects will not necessarily be 

equally shared by all segments of American society. Some examples:

Low-Income Americans

Social Security’s benefit formula is intended, in part, to reduce the risk of old-age poverty among lowincome workers. But accumulating evidence suggests that Social Security is not nearly as redistributive as

many people believe. Also, low-income households own few assets outside of Social Security and thus are

disproportionately affected by the benefit cuts that will occur under current law. Absent reforms, current

law will reduce benefits by over one-quarter after the Trust Fund becomes insolvent in 2038, pushing many

low-income households into poverty.

Three factors offset much of the intended redistribution within the current Social Security system. First,

lower-income individuals tend to have shorter life expectancies. As a result, low-income workers spend a

greater portion of their lives contributing to Social Security and a smaller portion collecting from it. 

Second, Social Security’s spousal benefit redistributes money from single individuals and two-earner 

couples to one-earner couples. For instance, under the current system a 30-year-old single low-income

male would receive a 2.22 percent real return on his contributions to the Social Security program (2.63 

percent for a single low-income female). By contrast, a high-income one-earner married couple would

receive a 2.75 percent return.7 Social Security is structured, in this and many other instances, to redistribute

income from single earners and working couples with less to couples in which one spouse can afford not to

work. Because low-wage earners are more likely to be single or divorced, they are less likely to receive a

spousal benefit. The highest risk of poverty in old age is faced by divorced, separated or never-married

women. 

Third, many people never become eligible for Social Security benefits because they do not have enough

years of contributions to earn their own benefits. Current Social Security rules require a worker to pay into

the system for roughly 10 years before gaining eligibility for retirement benefits.

7 Source: May 27, 2001 calculations from Social Security Office of the Actuary.
24

The Interim Report of the President’s Commission to Strengthen Social Security

8 Alan L. Gustman, Thomas L. Steinmeier, “How Effective is Redistribution Under the Social Security Benefit Formula?” NBER, March 2000; Julia Lynn 

Coronado, Don Fullerton, Thomas Glass, “The Progressivity of Social Security,” NBER, February 2000; Jeffrey Liebman, “Redistribution in the Current 

U.S. Social Security System,” Harvard University, July 2001. 

9 U.S. House of Representatives, Committee on Ways and Means, 2000 Green Book (Washington: Government Printing Office, 2000), p. 999.

10 Susan Grad, “Income of the Population 55 or Older, 1998,” SSA no. 13-11871, 1998, p. 104.

Social Security’s lifetime redistribution from high to low earners is haphazard at best. Numerous academic

studies show little systematic redistribution by income under the present Social Security retirement system

due to the complex interactions between tax collections, benefit formulas, spousal protections and life

expectancy.8 Even without the benefit reductions that will occur under current law, Social Security may not

remain an effective barrier against poverty.

Women

The current system contains spousal and survivors protections used disproportionately by women.

Nevertheless, poverty rates for women age 65 and over remain more than 70 percent higher than for elderly

men (11.8 percent vs. 6.9 percent). Widowed, divorced or never-married women also face particularly high

poverty rates in old age: 16.8 percent for widows over age 65, and 24.7 percent for divorced, separated or

never-married women over 65.9

Social Security plays a particularly important role in the lives of women. Despite changes in the workplace,

women on average still receive less wage income, have less non-Social Security pension coverage and are

more likely to miss time from the workforce. A working spouse may receive a spousal benefit no higher

than if she had not worked, reducing her incentive to enter the workforce.

Women also live an average of 5.5 years longer than men. Consequently, women are disproportionately

dependent on Social Security for retirement income. Non-married women over 65 rely on Social Security

for an average of 50 percent of their retirement income. Thirty-eight percent of unmarried women rely on

Social Security for 90 percent or more of their retirement income.10

If no action is taken by 2025, current benefit promises will exceed the program’s annual income by

approximately 25 percent. What this means is that failure to restructure Social Security poses a 

disproportionate threat to the overall retirement security of women, due to the comparatively larger 

impact upon them of the benefit reductions inherent in current law.
25

The Interim Report of the President’s Commission to Strengthen Social Security

Q u i rks In Benefit Stru c t u re Pose Pro blems For Certain Wo m e n

Spousal Benefits: Under Social Security’s spousal benefit rules, the spouse with lower lifetime

earnings (usually the wife) effectively receives either a benefit based on her own earnings or an

amount equal to half her spouse’s worker benefits, but not both. While fine for an era in which few

women worked outside of the home, today Social Security’s spousal benefit rules create inequities

between traditional single-earner couples and dual-earner couples in which both spouses work. 

Example: The Smiths and Joneses both have $3,000 total monthly earnings. Mr. Smith earns 

$3,000 while Mrs. Smith does not work outside the home. Mr. Jones earns $2,000 while Mrs. 

Jones earns $1,000. At retirement in 2001, Mr. Smith would be eligible for a monthly benefit of 

$1,292 and Mrs. Smith a spousal benefit of $646, for a total of $1,938. By contrast, Mr. Jones 

would be eligible for a monthly benefit of $984 based on his earnings and Mrs. Jones a benefit 

of $641 based on her own earnings, for a total of $1,625. While the two couples have identical 

total earnings, the single-earner couple receives benefits 19 percent higher than the dual-earner 

couple.

Divorce: A divorced woman must have been married for 10 years to be entitled to benefits based 

on her former husband’s earnings. The National Center for Health Statistics reports that marriages 

ending in divorce have a median length of just 7 years, and fully one-third of all marriages end

prior to the 10 years needed for benefit eligibility. In addition, Social Security’s actuaries project

that the number of divorced elderly women will rise; this increase would cause the current system’s

outdated divorce rules to affect more women.

Example: Mrs. Smith becomes divorced one day short of 10 years while Mrs. Jones’s divorce 

occurs just one day past 10 years. That is the sole difference between eligibility for benefits 

equal to 50 percent of the former husband’s benefit and no eligibility at all. Nor is remarriage a 

guarantee of spousal benefits. One-third of second marriages are disrupted through separation 

or divorce before 10 years. For women under age 25 at remarriage, 47 percent of second 

marriages are disrupted before 10 years. For African Americans, these percentages are higher.

Widows Benefits: A widow is eligible for the greater of her husband’s worker benefit or her own,

but not both. As a result, her household income may be cut by up to one-half upon his death. 

Since the cost of living for one person is almost as much as for two, the standard of living of the

surviving spouse is likely to fall. The poverty line for a single individual age 65 and over, for

instance, is only about 20 percent less than that for couples.

Like the spousal benefit, the survivor benefit formula favors single-earner households over 

dual-earner households. Since a widow is eligible for either her own benefit or her husband’s but

not both, women from households with identical total incomes could find themselves with different

benefits once widowed. Specifically, women who worked would receive lower widows benefits than

women who did not work outside the home.

Example: Mrs. Smith, who never worked outside the home, becomes widowed and is eligible 

for survivors benefits based on Mr. Smith’s $3,000 monthly income. By contrast, Mrs. Jones 

paid Social Security taxes over her lifetime. When she becomes widowed she can receive

benefits based on Mr. Jones’s $2,000 monthly income or her own $1,000 income, but not both. 

The result is that Mrs. Smith, who neither worked nor paid into the system, receives benefits 

more than 30 percent higher than Mrs. Jones, who is from a household with identical earnings 

and who worked and contributed her entire career.

Women from all incomes are affected by these aspects of Social Security’s benefit formula, but

low-income women, with little or no non-Social Security pension resources, suffer the most.
26

The Interim Report of the President’s Commission to Strengthen Social Security

11 Jeffrey Liebman, “Redistribution in the Current U. S. Social Security System,” Harvard University, July 2001.

African

Americans

Social Security pays retirement

benefits as an annuity that

begins at retirement and ends

at death, so those with shorter

life expectancies can expect to

receive less in retirement 

benefits. African Americans

have shorter life expectancies

than other groups, as shown in

the accompanying table. As a

result, an African American

earning the same lifetime 

earnings and paying the same

lifetime Social Security payroll

taxes as someone in the 

general workforce is likely to receive a lower rate of return and lower lifetime benefits from the retirement

system. Moreover, African Americans as a group also receive less in Social Security spousal benefits.

Forty-seven percent of African American marriages are disrupted before the first 10 years, and African

American women are substantially less likely both to remarry after divorce and to have a second marriage

last for the 10 years needed for spousal benefit eligibility.

Recent academic research finds that, as a result of mortality differences, African Americans receive nearly

$21,000 less on a lifetime basis from Social Security’s retirement program than whites with similar income

and marital status.11

African Americans are more likely to receive benefits from Social Security’s disability program than are

other groups. Moreover, because African Americans have higher death rates, their children are more likely

to receive benefits as child survivors. In 2000, 2.8 percent of African American children under 20 were

receiving a child survivor benefit, compared to 1.3 percent of white children and 1.7 percent of all children, according to the Bureau of the Census. Young African Americans are also more likely to receive

disabled child benefits as survivors. This at least partially mitigates the fact that African Americans receive

lower lifetime retirement benefits. But Social Security’s survivors, disability and retirement programs have

distinct purposes. If the retirement program can be improved for African Americans without offsetting

reductions in the survivors and disability programs, Social Security as a whole would better serve African

Americans.

It is likely that the opportunity for an inheritance would benefit African Americans relative to the general

population. This is because African Americans on average have less non-Social Security retirement savings

than the average worker. As a result, African Americans are disproportionately threatened by the financing

shortfalls facing the current system. They are more likely, on average, to die before receiving benefits. 

Age

Birth

10

20

30

40

50

60

65

70

80

White Male

74.6

65.3

58.2

48.6

36.9

28.0

19.8

16.1

12.9

7.5

Black Male

67.8

59.2

49.6

40.7

31.9

24.0

17.2

14.3

11.6

7.2

White Female

79.9

70.5

60.6

50.9

41.3

31.9

23.2

19.2

15.5

9.0

Black Female

74.7

66.0

56.2

46.6

37.4

28.7

20.9

17.3

14.0

8.6

Source: National Center for Health Statistics, “Deaths: Preliminary Data for 1999,” National Vital

Statistics Reports 49, no. 3, June 26, 2001

Black and White Life Expectancy, 1999
27

The Interim Report of the President’s Commission to Strengthen Social Security

Hispanic Americans

By some measures, Hispanic Americans fare better than the population as a whole under the current Social

Security system. This is the result of lower average lifetime earnings combined with higher life expectancies. Yet this makes Hispanics somewhat more vulnerable than average to a failure to change the current

Social Security structure. In 1998, Hispanics as a group paid $33 billion in OASDI payroll taxes but

received only $18 billion in benefits.

Though the program’s progressive benefit may appear to help Hispanics as a group, its financing structure

hits Hispanic Americans particularly hard. Hispanics tend to be younger than the American population as a

whole and would consequently bear a disproportionate share of the rising cost of sustaining an income

transfer system. Rates of return from Social Security are declining for younger workers, of which

Hispanics are one of the fastest growing ethnic groups.

Below-average private pension coverage for Hispanic workers is correlated with their below-average wage

levels and job tenure rates. Moreover, fewer than half of Hispanic households were net savers in 1998. The

poverty rate for Hispanics age 65 and over in 1998 was 22.5 percent, compared to 12.3 percent for nonHispanics.12 This greater reliance on Social Security creates greater vulnerability to the benefit reductions

that will occur under current law.

Hispanics represented 3.7 percent of the elderly population in 1990, but have grown to 5.6 percent today

and are projected to rise to 16.4 percent of the 65-and-older population in 2050, according to the Census

Bureau. Comparatively few Hispanics entered retirement having received the above-market rates of return

that the Social Security system provided in its early years. By the time today’s Hispanic taxpayers are eligible for retirement benefits, the current Social Security system would be paying substantially lower returns

than it did to earlier generations. 

Younger Generations

Younger generations have more at stake than other age groups and hence should be more interested in

Social Security reform. Taxes are sufficient to pay full benefits to current beneficiaries until 2016, and

there is a broad political consensus that current beneficiaries should not be affected by changes to the

Social Security program.

Young generations will bear the brunt of continuing exclusively with the current income transfer system.

As the ratio of workers to beneficiaries drops over time, the tax burden placed by Social Security on workers will increase. This means it is less and less likely that even average wage future workers will live long

enough to recover taxes paid into the Social Security retirement system. Single workers paying the maximum tax into Social Security and retiring in 2030 would have to live past age 110 simply to get back what

they had paid in.

12 Grad, Susan, op cit, p. 126.
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The Interim Report of the President’s Commission to Strengthen Social Security

As a result, rates of return

for younger workers will be

substantially lower than for

workers in the past. Most

young workers will receive

returns even lower than the

accompanying chart depicts,

because these figures neglect

the cost of meeting Social

Security’s cash deficits from

2016 through 2038. For 

example, those born in 1990

will spend most of their working careers after 2016, when

Social Security will require

additional tax revenues

beyond those tabulated here.

Though rates of return are not

the only important measure 

of system fairness, they

nonetheless illustrate the 

problems inherent in continuing exclusively with an income

transfer system. Under such a

system, entire generations will

receive rates of return below

those of risk-free government

bonds. In practice, they will be

forced to lose money through

Social Security.

Action to strengthen Social Security is more than an opportunity to restore fiscal soundness to the nation’s

public pension program. It is an opportunity to improve the program for all Americans, particularly those

Americans who need it most.

Year of 

Birth

1875

1895

1915

1936

1945

1955

1965

Age an average earner gets

back taxes paid into the

retirement portion of Social

Security

65.2

66.1

67.8

81.8

85.2

89.7

91.9

Source: Congressional Research Service, “Social Security: The Relationship of Taxes and Benefits for Past, Present, and Future

Retirees,” June 22, 2001; updated via telephone conversation with author. Under the intermediate assumptions of the 2001

Trustees Report and taking into account benefit increases and continued accrual of interest after retirement but not the taxation

of benefits. The retirees are assumed to begin work at age 22 and retire in January of the year in which they turn 65. Assumes

contributions earn interest equal to the long-term government bond rate. 

Total Life Expectancy for

Individual Reaching age 65

MALE

77.7

78.2

79.7

81.3

81.9

82.5

83.0

FEMALE

79.7

82.4

83.9

84.6

85.0

85.6

86.1

What age must you reach to get back what you’ve paid in?

Birth 

Year

1970

1980

1990

2000

Source: May 27, 2001 calculation by the Social Security Office of the Actuary

Single Male

(Medium

wages)

1.13

0.91

0.88

0.86

Single Female

(Medium

wages)

1.59

1.36

1.29

1.25

Single Earner

Couple

(Medium wages)

3.42

3.31

3.14

3.02

Two-Earner

Couple (Medium

/Low wages)

2.24

2.08

1.97

1.88

Real Rates of Return Falling for All Retiree’s

(Assumes No Change in Law, Retirement at Age 65)
An Opportunity to Become A Nation of Owners

and Savers

Increasing national saving is the only sure way to improve retirement security for current workers while

also lessening the burden on future generations. Increased saving leads to capital formation and higher

labor productivity, which will help a relatively smaller labor force maintain the standard of living of a 

relatively larger group of beneficiaries. It will expand the size of the economic pie available for 

everyone—both young and old—to consume. But America is not saving enough. 

At a time when additional saving is needed to provide 

for future retirees, our national retirement program does

not facilitate saving, either nationally or on behalf of

individuals. In order to provide for a better retirement

future, America must more truly become a nation of

owners and savers.

Few Americans own much in the way of liquid assets. In 1998, the median U.S. household owned only

$17,400 worth of financial assets, including sums in retirement accounts. Four out of every nine 

households in the United States saved nothing at all in 1998. Six out of 10 African American and

Hispanic households saved nothing that year.

For these families, Social Security contributions may represent their only hope to build assets and

wealth. In effect, those in the bottom half of the American population—and a larger population of the

African American and Hispanic population—lack a pool of private savings to support them in old age.

Meanwhile, 12.4 percent of low-income Americans’ earnings are collected to support a system that

offers uncertain promises and below-market rates of return.

As a rule, lowe r-income Americans do not participate in

financial markets. Under Social Security, their retirement income depends not on assets they possess but on

the hope that a Congress elected 20 or 30 years from

n ow will raise taxes on tomorr ow ’s wo r kers. In fact, the

Supreme Court has ruled in Flemming vs. Nestor ( 1 9 6 0 )

that wo r kers and beneficiaries have no legal ow n e r s h i p

over their benefits, even after a lifetime of paying taxes into the system.

M o r e ove r, the Social Security system may discourage individuals from saving on their own. A Congr e s s i o n a l

Budget Office study concluded “the Social Security system most like ly has had a nega t ive impact on priva t e

s av i n g .” 13

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The Interim Report of the President’s Commission to Strengthen Social Security

The median African American household

held only $3,060 in cash, certificates of

deposit, retirement accounts, or stocks

and bonds in 1998; the median Hispanic

household, only $1,200.

Even modest amounts invested in real

assets could produce substantial wealth. A

contribution of as little as $500 per year for

40 years at a 4 percent return would yield

$50,000.

13 Congressional Budget Office, “Social Security And Private Saving: A Review Of The Empirical Evidence,” July 1998
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The Interim Report of the President’s Commission to Strengthen Social Security

The failure of Americans to save raises troubling economic questions—and profound moral concerns. 

The strong growth of the value of financial assets over the past century means that many Americans can

look forward to a comfortable old age largely sustained by their own resources. But many others will have

to depend almost entirely on payments from the government. 

Tax payments to the Social Security program represent the largest contribution toward retirement for

most Americans. The ability of those Americans to save and accumulate assets will be determined

largely by whether such opportunities are created within Social Security.

Conclusion

The fiscal difficulties that become apparent in 2016 are the beginning of Social Security’s financing 

challenge, and there is no apparent end. The year 2016 is a signal to the nation to take steps now to address

the long-run problem. While we face long-term difficulties, we are also presented with a narrow—but

promising—short-term window of opportunity. Because of budget surpluses, our near-term fiscal situation

is positive. If we act now, we can use this window of opportunity to put the nation’s public pension system

on a sound financial footing. And if we act now, we can begin the process of saving and investing for the

future, of giving many Americans their first opportunity to build a measure of wealth and to leave an estate

for their heirs.
31

The Interim Report of the President’s Commission to Strengthen Social Security

Analytical Criteria

The President’s Executive Order establishing the Commission requires the interim report to set forth 

“criteria by which the Commission will evaluate reform proposals.”

First and foremost, our criteria must be consistent with the President’s principles for strengthening Social

Security, as outlined in the Executive Order.

The President’s Principles For Strengthening 

Social Security

(1) Modernization must not change Social Security benefits for retirees or near-retirees.

(2) The entire Social Security surplus must be dedicated to Social Security only.

(3) Social Security payroll taxes must not be increased.

(4) Government must not invest Social Security funds in the stock market.

(5) Modernization must preserve Social Security’s disability and survivors components.

(6) Modernization must include individually controlled, voluntary personal retirement accounts, 

which will augment the Social Security safety net.

Within those principles, the Commission has been provided with flexibility to recommend measures to

improve the fiscal soundness of Social Security as well as to propose the size, structure and financing of

personal accounts. To develop a bipartisan consensus on these points, understanding of the Commission’s

criteria and standards is essential. Our eight criteria of analysis are presented on the following page.
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The Interim Report of the President’s Commission to Strengthen Social Security

Criteria for Analysis

The Commission has established eight criteria by which to evaluate proposals for strengthening

the Social Security system:

1. Encouragement of workers’ and families’ efforts to build personal retirement wealth, giving 

citizens a legal right to a portion of their benefits.

2. Equity of lifetime Social Security taxes and benefits, both between and within generations.

3. Adequacy of protection against income loss due to retirement, disability, death of an earner, or 

unexpected longevity.

4. Encouragement of increased personal and national saving.

5. Rewarding individuals for actively participating in the workforce.

6. Movement of the Social Security system toward a fiscally sustainable course that reduces 

pressure on the remainder of the federal budget and can withstand economic and demographic 

changes.

7. Practicality and suitability to successful implementation at reasonable cost.

8. Transparency: Analysis of reform plans should measure all necessary sources of tax revenue, 

and all benefits provided, including those from the traditional system as well as from personal 

accounts.
President’s Commission to Strengthen Social Security

734 Jackson Place NW

Washington, DC 20503

(202) 343-1255

www.csss.gov