Paul Krugman explains Social Security's long-run budget situation:
Long-run budget math, by Paul Krugman: Some commenters have asked for more about Social Security’s role in the long-run budget problem, and in ... my assertion that the Beltway obsession with Social Security reflects ignorance. So here’s a quick, informal explanation.
Start with the current position. Last year, federal spending on Social Security, Medicare, and Medicaid was 8.5 percent of GDP, equally divided between Social Security and the health care programs. Dismal long-run projections, like those of the GAO, have this total rising by 10 percentage points of GDP by mid-century.
So, how much of this is a Social Security problem? ...[T]he percentage of GDP spent on Social Security [will rise] from about 4 to 6 — that is, a rise of about 2 percentage points of GDP, which is a small fraction of the entitlements problem. See, for example, this chart from my NY Review of Books piece on the subject.
What’s more, Social Security has already been strengthened to deal with this rise. In 1983 the payroll tax was increased and adjustments made to the retirement age, so as to build up a trust fund. According to the “intermediate” projection of the Social Security trustees, this trust fund will be exhausted in 2041 — but they also present a more optimistic scenario, based on economic assumptions that don’t seem at all outlandish, in which the trust fund goes on forever.
This brings us to the claim that the trust fund doesn’t exist, because it’s invested in government bonds. The full explanation of why this is sophistry is here.
The bottom line is that Social Security is just not the major problem.
Now, part of the projected rise in Medicare and Medicaid costs represents the effects of an aging population. But as a new report from the CBO explains, demography is only a minor factor — mainly it’s rising health care costs. What’s more, the proposed “solutions” for the Social Security problem have no relevance to the issue of rising Medicare costs — even if privatization were a good idea, which it isn’t, it would do nothing to solve the problem of rising medical bills.
The Beltway obsession with Social Security is a classic case of a little knowledge being a dangerous thing. People have picked up a few facts about demography, and think they understand the long run budget problem. They don’t.
Update: See also Millions, Billions, Trillions, Who's Counting? by Dean Baker.