June 28, 2011
Social Security should remain off the table during the debt ceiling discussions—let’s just get that compromise done, okay, guys?—but mark your calendars: Social Security needs a big fix, and soon. If you have any doubt, take a look at this week’s analysis of Social Security’s annual trustees report, by Alicia Munnell of the Center for Retirement Research at Boston College.
Munnell takes a determinedly non-hysterical view of the report, which quietly went public last month. But if you aren’t already deeply familiar with Social Security’s crumbling finances, as Munnell is, the new numbers can be a tad unsettling. For example:
- Since last year, the present value of Social Security’s long-term funding gap widened by $1.1 trillion. In one year.
- Last year, the trustees reported that Social Security would be unable to pay all of its promised benefits beginning in 2037; now the expected default year is 2036.
- The year in which Social Security is projected to start running in the red—that is, the year in which it will start adding permanently to the budget deficit—advanced from four years in the future to one year in the past.
First, Social Security stalwarts can’t say any more that the program
doesn’t increase the deficit . Until last year, Social Security actually reduced Washington’s need to borrow, since the program took in more FICA tax revenue than it had to pay out in benefits. That was supposed to continue (with the exception of last year and this) until 2015. But in one of the more alarming changes from last year’s trustees report, the year of permanent red ink (revenues falling below costs and staying there) jumped ahead to 2010. In other words, we’ve been operating in the red for a year now, and it’s not going to change.
At least until 2037—er, make that 2036 —Social Security can make up the shortfall by tapping its trust fund. Tapping the fund means, essentially, that Social Security presents a bill to the U.S. Treasury and Treasury has to pay. Of course, Treasury has to get the money from somewhere. And that means higher taxes, reduced spending elsewhere, or more borrowing. More borrowing means a wider deficit. Got it? To use the highly technical language of accountants, Social Security has gone from being a deficit good guy to a deficit bad guy five years ahead of schedule.
Second, you can’t blame it on the boomers. The usual explanation for Social Security’s funding problems is that the baby boomers are too big a load on the system. But as Munnell notes, the program doesn’t get any better after the boomers die off. The reason: The boomers’ kids aren’t having enough kids themselves.
Remember Social Security is a pay as you go system: today’s workers' taxes pay today’s retirees’ benefits. To keep going, the program needs a lot more workers than retirees. Or as financial writer Jane Bryant Quinn put it, “It’s a saving program in which you deposit children.” The younger boomers and Gen-Xers haven’t been depositing enough future workers to take care of them.
Third, you can’t say the payroll tax is temporary. You and everyone else with a paycheck got a two percentage point cut in your Social Security payroll tax this year. Taxes, once cut, are hard to reinstate. (Remember the Bush tax cuts that were supposed to expire in 2010?) And, in fact, the main topic among policy makers regarding this year’s Social Security tax cut is not when to restore it but how long to extend it and whether to stretch it to 3 percent and maybe to offer it to employers as well as employees. That’s great for your pocketbook, possibly helpful for the economy, but it, too, widens the deficit. The law says the payroll tax cut has to be replaced by general revenues, so the tax cut doesn’t change Social Security’s accounting, but that’s just fiscal sleight-of-hand: you the taxpayer eventually cover the cost, whether it comes out of your FICA taxes or your income taxes.
More to the point, the shifty accounting dodges the Big Question about Social Security. As Munnell puts it:
While Social Security’s shortfall is manageable,
it is also real. The long-run deficit can be eliminated
only by putting more money into the system
or by cutting benefits. There is no silver bullet.
Eventually, the patient has to go on the table. Because Social Security is a closed system widely loved by voters, it could be one of the easier milestones on our inevitable forced march to fiscal sanity. But you need adult politicians to have an adult conversation about Social Security. And where are they?
Social Security: New Pawn in Debt Ceiling Battle (The Fiscal Times)
AARP Open to Discussing Social Security Changes (The Fiscal Times)
Inside the Social Security Wage Cap (The Fiscal Times)