Fixing Social Security — the right way

April 27, 2012

Well, there’s at least one virtue to the depressing numbers that Social Security’s trustees unveiled last week — they prove that I was right. In February I wrote that the system’s finances had deteriorated badly, due largely to the energy price boosts created by the Arab Spring. And so they have: Those increases were the primary factor in Social Security’s inflation adjustment hitting 3.6 percent this year rather than the 0.7 percent baked into the trustees’ 2011 report. That added significant costs to Social Security, but little or nothing in the way of added revenue to help offset them.

Now that the gloomy numbers are official, people belatedly are pointing with alarm to the projections that Social Security’s cash expenses will exceed its cash income as far as the eye can see. (For details, see the intermediate case on Table VI.F8 on p. 206 of this year’s report.)

By contrast, last year the trustees projected positive cash flow for several years, which would have given the system a little breathing space.

Being a born contrarian, I won’t join the gloom-and-doom crowd. Instead, I’ll try to show you some numbers you haven’t seen before about how important it is to fix Social Security the right way — and quickly — to avoid hurting the most vulnerable members of our society. And I will offer you hope, a commodity in rare supply these days.

We will skip all that stuff about the Social Security trust fund (which has accounting and political significance but no economic significance) and go straight to the number that matters.

To wit: Last year, the Treasury had to borrow $160 billion to give to Social Security so that its checks (okay, its electronic deposits) wouldn’t bounce. Even in an era of trillion-dollar budget deficits, that’s serious cash. The borrowing consisted of $103 billion to cover the cost of the “holiday” reducing employees’ Social Security taxes, and another $57 billion to redeem Treasury securities that Social Security’s trust fund cashed in.

This kind of borrowing can’t be sustained indefinitely. So far, we haven’t seen adverse effects on interest rates because the Federal Reserve is holding rates down by buying vast amounts of Treasury securities. But when the Fed stops doing that — which it will, sooner or later — big trouble will set in if we haven’t cleaned up our act.

These numbers are all familiar. Now, to numbers you’ve probably not seen. In a fascinating April report — okay, it’s fascinating to numbers junkies, not to normal people — the Center for Economic and Policy Research calculated the impact of Social Security benefit cuts to various groups ranging from lower-income single people who don’t own homes to the well-off (albeit not rich) likes of my wife and me, who own our home. It did this by placing a dollar value on projected Social Security benefits, a good way to put the number in an overall wealth context.

I make out much better than a lower-income single non-homeowning person does if Social Security is cut across the board, say by increasing the retirement age. That’s because even though any benefit reductions cost me more dollars than such a person because my benefits are higher, Social Security is a far smaller proportion of my net worth.

Social Security benefits represent a stunning 92 percent of the net worth of single non-homeowners whose income is in the bottom 80 percent of all Americans, according to this study, compared to 62 percent for married homeowners in the bottom 80 percent, and only 19 percent for those in the 80 to 99 percent bracket. (I’m in the top 2 or 3 percent bracket, which isn’t broken out.)

So if we’re going to cut benefits — which I think is inevitable — let’s be careful to concentrate the impact on the likes of me (for whom Social Security is important, but not crucial) and mitigate the impact on the less fortunate.

Why do I think that’s doable? Because the key players involved in its number crunching — who will ultimately design a plan — are people of good faith. Take Social Security’s two public trustees — Chuck Blahous and Robert Reischauer — who span the right-wing left-wing political spectrum. You could see clearly at the report unveiling that they like and respect each other — even though they disagree. The world of Social Security techies, in which I’ve traveled for more than a decade, is full of people like Blahous and Reischauer.

So, I have faith that sooner or later — I hope sooner — it will finally occur to politicians that there’s a huge downside to not fixing Social Security and having benefits cut by 25 percent in 20 years or so, if things continue on their current path. Once that happens, I think the faceless bureaucrats, many of whom I’ve come to know and like, will make a deal happen. And Social Security will be there for my children, none of whom currently expects to see a dime from it.

Sloan is Fortune magazine’s senior editor at large. To read his previous columns, go to postbusiness.com.

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