March 24, 2011

Young people often ask me whether Social Security will be there for them. My answer has traditionally been: Yes, it will be there. It will probably pay less than it is currently promising you. You should not expect a generous return on your contributions. You may have to pay more in payroll taxes. But the basic structure of the program is likely to remain intact.

Recent events require a reassessment of this answer. Chances are now markedly increasing that Social Security will eventually cease to operate as the self-financed, earned-benefit system that Americans have long known it to be.

Many recent statements by public officials express a mind-set in which fiscal repairs to Social Security might be deferred for years. Administration officials play down the urgency of action by pointing to still-growing balances in the program’s trust fund. A recent Senate bill would erect steep procedural barriers against many measures to improve system finances. Even the Senate majority leader recently asserted that Social Security could be safely left alone until “two decades from now.”

If these statements are indicative of near-term policies, Social Security is in very deep trouble.

Social Security last approached the brink of insolvency in 1983. An interruption in benefit checks was only months away. Despite this urgency, rescue efforts broke down several times before negotiators reached a last-minute bipartisan accord. The 1983 reforms were difficult to negotiate and enact. They neared the limit of the sudden changes that our political system is willing to make to preserve Social Security as a self-financed system.

Today Social Security already faces a long-term shortfall much larger than that corrected in 1983. Many do not realize this because the program trustees’ actuarial methods have since changed. The shortfall is now more than 50 percent larger if measured the same way. In 2031, the problem will be more than twice as large as it was during the 1983 crisis.

Even this isn’t the biggest issue. By 2031, the long-term problem will be a near-term emergency. The size of adjustments required just to make near-term benefit payments would far exceed anything done in the past. Reforms would need to improve annual program balances in 2037 and beyond by amounts adding up to more than 3 percent of each American worker’s total taxable wages.

For perspective, consider what was done in 1983: Payroll taxes were increased. Cost-of-living adjustments to seniors were delayed. New taxes were quickly applied to Social Security benefits. Federal employees (and their payroll taxes) were ushered rapidly into the program.

These sudden changes were intensely controversial and drew fierce opposition from AARP. But even these reforms together improved the system’s annual operations by less than 1 percent of worker taxable wages on average in the following 10 years.

If Congress waits two decades to act, the measures required to keep Social Security afloat just temporarily — not even for the long term — would be more than three times as harsh as the emergency measures enacted in 1983. We would be long past the point where Social Security reforms would be difficult; it’s far more likely that they wouldn’t happen.

So what would happen instead? If we delay until 2031, taxpayers would already be providing $280 billion annually in additional general revenue (read: income taxes), just to redeem trust fund bonds and to keep benefit payments flowing. These obligations of general revenue would be nearly as great as the amount required to fix the shortfall after 2037.

Given those circumstances, what would legislators do? Would they impose sudden benefit reductions and tax increases more than three times larger than in 1983, to preserve Social Security’s continued ability to finance itself? Or would they shrug and say, “Well, general-income taxpayers are effectively subsidizing Social Security already. Let’s just formally have them keep doing it.”

The answer seems obvious. Faced with a choice between wrenching benefit cuts and/or payroll tax increases vs. tearing down the wall between Social Security and the rest of the budget, legislators will tear it down.

And that would be the end of Social Security as we know it. No more separate trust fund. No more special parliamentary protections. No longer would benefit payments be shielded from the chopping block by the rationale that they were funded by separate payroll tax contributions. Social Security would be financed from the general revenue pool, and its benefits would thereafter have to compete with every other federal spending priority.

Predictions in politics are dangerous, but I make one here for the record: If Social Security repairs are delayed several more years, then within one generation from now we will witness the end of Social Security as we have long known it. The irony would be that the program was done in by its supposed defenders.

Charles Blahous is a research fellow with the Hoover Institution and a public trustee for Social Security and Medicare. He is the author of “Social Security: The Unfinished Work.”