Fiddling while Social Security burns
Procrastination is rarely a cost-free strategy. That is true when it comes to fixing Social Security — as much as the Obama administration and, even more forcefully, its allies on the left may wish to believe otherwise.
Their "what's the big rush?" message goes like this: The retirement program isn't really contributing to deficits in the short run. Indeed, its finances are healthy enough so that it can continue paying all promised benefits for more than two decades, until 2037. Even then, if absolutely nothing is done, Social Security would be able to pay about 75 percent of promised benefits. So where's the fire?
Here it is.
Last year, for the first time in its history, Social Security paid out more in benefits than it received in payroll taxes. The recession caused this shortfall: Seniors who lost their jobs chose to start collecting benefits earlier, while payroll tax collections fell because of high unemployment and lower wages. As a general matter, it's true — although less than previously — that Social Security is not a cause of short-term deficits. In fact, until last year, the surplus in the Social Security trust fund masked the true size of the current deficit. But the 2010 experience is a hint of things to come — soon. By 2015, Social Security will be increasing the deficit every year, not obscuring it.
Still, that's not the real problem, or the strongest argument against thumb-twiddling. The reason is that making changes now will make it easier to protect the very people that the "Social Security's not a problem" brigade say they care about. The Social Security trustees make this point every year in their annual report about the system's finances: "If action is taken sooner rather than later, more options will be available and more time will be available to phase in changes so that those affected have adequate time to prepare."
The challenge isn't huge, but it is significant. As a useful paper by Charles Blahous and Robert Greenstein for the Pew Fiscal Analysis Initiative explains, when the trust funds run out, the gap between Social Security revenues and benefit payments will be 1.3 percent of the gross domestic product — about one-fifth of the projected deficit then.
Yes, Medicare and Medicaid present a bigger challenge, but the Social Security shortfall represents a significant slice of the deficit. Unlike the health programs, whose solvency ultimately depends on the uncertain enterprise of slowing cost growth, the potential fixes to Social Security are both obvious and reliable. If you raise payroll taxes, you know more revenue will come in. If you reduce benefits, you know costs will go down.
Some in the just-wait crowd argue that maybe things won't turn out as badly as the experts expect. Economic growth could be stronger. Higher levels of immigration could boost the payroll tax revenues coming into the program. Don't bet on it. Yes, long-range projections are notoriously inaccurate. But the trustees' analysis shows that there is an 80 percent likelihood the system will go broke between 2032 and 2045. The chance of no shortfall is vanishingly small.
The cost of delay is measurable. In fact, the Congressional Budget Office measured it. "With every year that goes by," it found, "larger changes would be needed to create a balance over the next 75 years between scheduled revenues and scheduled benefits."
Take the example of raising the payroll tax rate by 2 percentage points. If the increase were to start in 2012 and be phased in gradually over 20 years, the trust funds would not be exhausted until 2083. But dawdling for a decade would make it significantly harder to achieve the same result: the tax rate would have to go up by 2.6 percentage points rather than 2 points.
The same is true of benefit cuts. Imagine that benefits were cut 15 percent for new retirees beginning in 2017. That would keep the trust fund solvent until 2076. To achieve the same result but start a decade later, benefits would have to be slashed by one-third more -- 20 percent instead of 15 percent.
Dealing with Social Security now would require less in the way of punishing tax increases or benefit cuts. It would give future retirees more time to plan and save. It would reduce the burden placed on younger workers to shoulder the cost of sustaining the program. The procrastination caucus ought to embrace these outcomes, not forestall them.