By Ruth Marcus
Wednesday, November 28, 2007
Social Security isn't a big-deal problem because, absent any change, the system will be able to pay 75 percent of promised benefits in 2041. Even those reduced benefits would be larger, in real terms, than what current retirees receive.
Those numbers are correct; the implication isn't. Social Security represents the only source of income for one-third of elderly households and more than half the income for another third. No one wants to see those benefits suddenly slashed by a quarter -- least of all those who care about preserving what Franklin Roosevelt called "some measure of protection . . . against poverty-ridden old age."
Advocating thumb-twiddling as sensible strategy ignores the reality that acting sooner spreads the burden of change across more generations, allows changes to be phased in gradually and lets future retirees plan ahead.
As Jason Furman, a Clinton White House economic policy aide, explains, "The longer we wait on Social Security, the worse the options become. . . . Anyone interested in the highest possible level of benefits should want to get more revenue into the system starting today -- not starting twenty years from now."
Social Security isn't a big deal because the shortfall is small (less than 2 percent of taxable payroll), smaller when measured as a share of the economy (less than 1 percent of gross domestic product).
The shortfall is small, and it's a lot smaller than the Medicare shortfall. But increasing taxes or cutting benefits by an amount equal to 2 percent of payroll shows only what it would take to make Social Security solvent if that change were made immediately. Even then, this is only the amount needed to shore up the program for the 75-year actuarial period, leaving it suddenly strapped for cash at the end of that time.
Waiting decades would require a much bigger tax bite or benefit cut. Social Security isn't the biggest budgetary challenge, but it's the largest single federal program and the most easily fixable.
Social Security isn't as big a deal as it was a few years ago because the insolvency date has been pushed back, from 2029 (the projection in 1996) to 2041 (the projection this year).
The projections have improved, but the problem remains. Those who thought Social Security was a significant problem in 1996 (insolvency projected 33 years off) can't cavalierly dismiss the matter today (insolvency projected 34 years off). "The bottom line is that the long-run outlook has remained virtually unchanged for the last thirteen years," writes Alicia Munnell, a member of Bill Clinton's Council of Economic Advisers.
Social Security isn't a big deal because the trustees' projections are based on unduly pessimistic assumptions, including anticipated economic growth that is slower than has been the case for the past several decades.
The projected slowdown in economic growth is based largely on the slower growth of the workforce, which is inevitable unless fertility rates or immigration soar beyond all predictions. Better-than-expected growth cuts both ways: It increases the amount of payroll taxes coming into the system but also the amount of benefits owed. Even if the economy were to grow significantly faster than predicted, that growth would push insolvency back by only six years. Weighing in the opposite direction: The trustees' projections on life expectancy may be too low -- good news overall, bad for Social Security.
Yes, the trustees' optimistic scenario shows Social Security solvent for more than 75 years, but that is so unlikely (fertility would have to return to pre-1970s levels, for one) that Social Security puts the chances at less than 2.5 percent.
Furthermore, Social Security's intermediate projections are in line with those of other experts. "There is a greater than 99 percent probability that total outlays over 100 years will exceed total revenues," the Congressional Budget Office found last year.
Social Security wouldn't be a big deal if politicians would stop raiding the trust fund for other purposes, such as financing President Bush's tax cuts.
This point conflates the Social Security shortfall with the larger question of fiscal discipline: using the trust fund to underwrite current spending (especially Bush's unaffordable tax cuts) and mask the real deficit. Eventually, the government's borrowing is going to have to be repaid, adding budgetary pressure at precisely the wrong time -- a strong argument for a more prudent fiscal policy. But Social Security would face the same shortfall even if the now-forgotten lockbox had not been picked.
Social Security is only a big deal to people who hate the program and want to see it destroyed -- or to their ignorant dupes.