Leadership on Social Security Desperately Needed

EXPERT COMMENTARY

Leadership on Social Security Desperately Needed

By Charles Blahous |
Jan 22, 2013

When President Obama was first inaugurated four years ago, the budget-related meme of the moment was that virtually all of our projected fiscal problems were due to health care, and Social Security represented a relatively small problem. After all, the previous year’s trustees’ report had shown twice as large a deficit in Medicare’s HI fund than was projected for all of Social Security.  The previous December Social Security was barely mentioned in a comprehensive memorandum on economic and fiscal issues provided to the president-elect by his advisors. The long-term deficit was said then to be “driven primarily by rising health care costs” alone.

What a difference four years make. Little of what was said then has turned out to be true. First Social Security was hit hard by the recession, depressing its payroll tax revenue and stimulating additional disability and early retirement benefit claims.  Social Security’s expenses began to exceed its tax income in 2010, earlier than projected in any prior trustees’ report.  The program began adding substantially to the federal deficit and is now projected to do so more with each passing year. The Social Security disability trust fund is now projected to be insolvent in 2016, just three short years away.

While Medicare remains the greater long-term threat to the general federal budget, in many respects the Social Security problem has surpassed it in near-term urgency. Over President Obama’s first term Social Security expenditures remained, as expected, higher than Medicare’s. But Social Security’s cost growth was greater as well – not only in aggregate dollars (annual costs grew by over $160 billion in Social Security vs. less than $120 billion in Medicare) but even in its rate of growth. Over the past four years, annualSocial Security costs have risen by 26% (25% for Medicare).

Not only does Social Security disability face insolvency in 2016, but the overall program’s actuarial deficit is now roughly twice as large as Medicare’s. Of course, the actuarial imbalance is not the only meaningful indicator of the financial strains caused by the two programs. It does, however, mean that Social Security is the program for which stronger actions are now required to prevent insolvency.

We clearly cannot afford to wait until Social Security is nearing its projected insolvency date (2033 for its combined trust funds) to make the needed repairs. Well before then the choices will become so onerous that there is little practical likelihood they will be made. One reason is that lawmakers generally try to avoid cutting Social Security benefits for those already collecting them. By 2033, even eliminating all benefits for new retirees would be insufficient to close the program’s deficit, as would the largest payroll tax increase heretofore enacted. With so many baby boomers now entering the Social Security rolls each year, the window of opportunity for stabilizing its finances is shutting very soon.

As I have explained before, there is no precedent for completely closing a Social Security financing shortfall of the size we now face, meaning it may already be too late to get the job done. To save the program in 1983 lawmakers had to do a number of difficult things: delaying COLAs by six months, raising the retirement age, exposing benefits to income taxation, bringing federal employees and their payroll taxes into the program, and accelerating an increase in the payroll tax, among other things.  These changes were so controversial that they drew the spirited opposition of the AARP and almost didn’t happen even though an interruption of benefit checks was just months away.  Yet today we face a shortfall nearly twice as large in relative terms; to sustain the program now the political left must agree to twice as much in benefit restraints, and the right twice as much in tax increases. There is no assurance that this will happen. And with every year of further delay, the problem becomes even less likely to be solved.

Despite all this, White House Social Security rhetoric has thus far barely changed from four years ago. Some senior Administration officials have continued to downplay the Social Security shortfall as though the program’s financial downturn never even happened. Outside of the White House, it is impossible to know the reasons for this inattention. Without action, Social Security costs will grow to absorb fully one out of every six dollars workers earn within just twenty years, such that the program could only be sustained by merging it into the general fund, ending the perception of Social Security as an “earned benefit” and having income taxpayers subsidize payments as with other welfare programs. Many of us would regard this as a disastrous end to FDR’s Social Security legacy; one hopes President Obama would as well.

Social Security would warrant reform even if insolvency were not threatened. As currently structured it will ultimately fail to meet minimum standards of fairness and efficacy. Young workers now entering the Social Security system as taxpayers are projected to lose over 4% of their lifetime wages to the program, even if they receive all benefits now being promised.  The program also acts as a drag on employment, especially by seniors.  I have proposed reforms to repair the program’s severe work disincentives while also improving its finances.  We also need to change the benefit formula if for no other reason than that the cost of maintaining the current one forces workers to experience declining pre-retirement living standards.

The recent discussion of possible changes to the Consumer Price Index (CPI) exemplifies the continuing lack of seriousness about Social Security. Correcting how we measure inflation is not a Social Security reform – it is merely a government-wide technical reform that happens to have a beneficial spillover effect on Social Security finances. For some to react to this as a severe Social Security “cut” is absurd. If we cannot even make a technical correction in CPI, pursuant to the clear intent of current law to accurately measure inflation, simply because it would slightly slow the growth of program costs, we are in big trouble: real Social Security reform will ultimately require adjustments roughly six times as large.

Given all this, is there hope for Social Security? There is, if the President leads. Remember that in his 2010 health reform effort he persuaded his own party’s legislators to support cuts in Medicare growth far greater even than what is now required to fix Social Security finances. His political base accepted enormous entitlement reductions they surely would have attacked had these been proposed from across the aisle. I thus have no doubt that if President Obama chooses to lead on Social Security, making an aggressive case for prompt action and pursuing specific reforms, it can be done. Without such leadership, however, Social Security’s days as a self-financing program are almost certainly numbered.

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