Social Security Surplus

Social Security surplus = number of workers × tax rate × income− number of retirees × Social Security payment. For the first half-century of Social Security, there was an approximate match between payments and receipts, although receipts were usually slightly larger than payments. In other words, rather than being exactly pay-as-you-go, the system typically ran a small surplus each year. [4] The Social Security Trust Fund contains the accumulated surpluses of past years. It gets bigger or smaller over time depending on whether the surplus is positive or negative. For example, Trust Fund balance this year = Trust Fund balance last year + Social Security surplus this year. (Strictly, that equation is true provided that we continue to suppose that the real interest rate is zero.) If tax revenues exceed payments, then there is a surplus, and the Trust Fund increases. If tax revenues are less than payments, then there is a deficit (or, to put it another way, the surplus is negative), so the Trust Fund decreases. The small surpluses that have existed since the start of the system mean that the Trust Fund has been growing over time. Unfortunately, it has not been growing fast enough, and in 2010, the fund switched from running a surplus to running a deficit. There are still substantial funds in the system—almost a century’s worth of accumulated surpluses. But the dependency ratio is so high that those accumulated funds will disappear within a few decades. Resolving the Problem: Some Proposals We can use the life-cycle model of consumption/saving along with the government budget constraint to better understand proposals to deal with Social Security imbalances. We saw that the surplus is given by the following equation: Social Security surplus = number of workers × tax rate × income− number of retirees × Social Security payment.

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