The Economist on Social Security Reform

In a discussion of the economic agenda of Dubya's second term, The Economist weighs in with a remarkably fair-minded assessment of Bush's plans to reform the Social Security system:

As in most of the rest of the world, the combination of longer life expectancy and lower birth-rates will put increased financial pressure on this pay-as-you-go social insurance system. Over the coming decades, Social Security's payments will rise much faster than its revenues, which come from payroll taxes. The net present value of this financial imbalance over the next 75 years is $3.7 trillion, less than 1% of cumulative GDP. Over an even longer horizon, the present value of the permanent imbalance is estimated at around $10 trillion, a number Mr Bush loves to repeat.

These numbers can be hard to interpret, but the larger point is that Social Security is on an unsustainable trajectory, one that goes well beyond the retirement of the baby-boomers. It is not an immediate “crisis”. In fact, payroll-tax revenues will exceed pension payments until 2018, masking America's overall fiscal imbalance. Nor is it America's biggest long-term fiscal problem. The financial burden from Medicare will be much bigger... Mr Bush's first-term decision to introduce a prescription-drug benefit for retirees worsened Medicare's long-term financial imbalance by more than twice as much as the entire Social Security problem. Nonetheless, Social Security needs fixing. And that means either boosting revenues (for instance, by raising payroll taxes) or reducing promised benefits.

(Related: The Heritage Foundation's Social Security Calculator, and a modest proposal for additional tax reform in a second Bush administration)