Policy Note 1999/5 How Can We Provide for the Baby Boomers in Their Old Age? Dimitri B. Papadimitriou and L. Randall Wray Accumulation of financial assets in the Social Security Trust Fund does not, by itself, ensure that retiring baby boomers will obtain a sufficient share of society's output in the year 2020; only use of the tax system in 2020—not accumulated assets or budget surpluses—can guarantee that result. And, even if it were true that budget surpluses could increase productive capacity, such an outcome is best left to general fiscal policy rather than to the Social Security program. There is, therefore, no theoretical justification for running large OASDI surpluses. T he current belief behind the operation of OASDI is that accumulating large financial balances in the Trust Fund can help ease the burden on future workers created by demographic changes and slow projected growth of taxable real wages. 1 The purpose of the Trust Fund is thought to be to accumulate financial reserves now, which can be depleted in later years, when Social Security program expenditures exceed the revenues that will be generated from a shrinking tax base. In other words, the annual surpluses will be "saved" over the next 20 years in order to provide for the future consumption of retiring baby boomers. The thinking behind much of the debate over Social Security seems to be based on the belief that if we do not increase financial saving, retirees will not get a sufficient distribution of society's output of goods and services in 2020 or 2030 or other years into the future. However, if sufficient distribution of goods and services is what the debate is really about, almost all of the solutions proposed thus far have at best an uncertain probability of succeeding. This is because most proposals center on increasing the size of the Trust Fund—by some combination of reduced benefits and increased tax rates in the near term and by increasing the fund's rate of growth, for example, by "investing" it in the stock market to obtain higher returns than those expected to be earned on its stock of government bonds. It is supposed that a larger Trust Fund will postpone a "day of reckoning" since its interest earnings will supplement payroll tax receipts and assets can be sold when total revenues fall short of expenditures. This is the path recommended by President Clinton in his State of the Union Address when he proposed that just over 60 percent of projected government budget surpluses over the next 15 years be "set aside" for the Trust Fund. The Treasury would use the surpluses to retire outstanding debt currently held by the public, but would then issue an equivalent amount of debt (that is, 62 percent of the total budget surplus each year) to be held in the Trust Fund. However, unless accumulation of the Trust Fund actually enhances society's ability to produce goods and services in the year 2020, the output to be distributed will be exactly the same whether the Trust Fund is larger or smaller. In this case, the only economic justification for a larger Trust Fund is the belief that it will increase the distribution going to the retiring baby boomers. We believe there is no way to guarantee that accumulation of the Trust Fund will shift the distribution of goods and services toward future retirees, and it is not clear that a larger Trust Fund will result in a more desirable distribution. Is there a better and more direct way to ensure that the distribution will be shifted toward retiring baby boomers? Yes—through use of the tax system in the year 2020 or 2030 or whenever receipts fall short of expenditures. In this note we will argue that amending general budget policy would be a more equitable means of directly accomplishing the distributional goal than would amending OASDI alone. In the year 2020, if it is decided that the elderly should get a larger share of goods and services, payroll taxes can be increased (reducing workers' disposable income) and benefit payments to the elderly can be increased. If the desired goal is to affect distribution of goods and services in the year 2020, it is far more direct and preferable to raise payroll taxes in the year 2020 than to raise them today in an attempt to accumulate financial