Social Security Deficit Could Mean a 25% Benefit Cut
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Social Security Deficit Could Mean a 25% Benefit Cut

iStockphoto/The Fiscal Times

With little notice in the run-up to tonight’s presidential debate in Colorado, the non-partisan Congressional Budget Office reported on Tuesday that for the second consecutive year, the Social Security trust fund took in less in tax revenue than it paid out in benefits in 2011.

Last year, spending by the federal pension program exceeded dedicated tax revenue by four percent – just as spending outpaced revenues the year before – and that gap is growing fast, according to the report. “As more members of the baby boom generation enter retirement, outlays will increase relative to the size of the economy, whereas tax revenues will remain at an almost constant share of the economy.”

That means, for example, that over the next decade, spending will exceed dedicated tax revenues, on average, by about 10 percent. The gap or shortfall will grow larger in the 2020s and will exceed 20 percent of tax revenues by 2030.

Those gap calculations don’t take into account the interest accruing on Social Security assets that when factored in transforms a seeming deficit into a surplus. But the Social Security Administration projects that  Social Security will deplete its trust fund in 2033, and that after that, retirees would receive only 75 percent of promised benefits without changes to the system.

There is widespread consensus among policy experts that the long term problem could be fixed relatively easily by tweaking the program in any number of ways, such as boosting the percent of wages covered by the Social Security tax from 83 percent to its formal level of 90 percent, or raising the Social Security tax rate by two percentage points.

Alice Rivlin, the former director of the Congressional Budget Office and a Clinton era budget chief, said earlier this week that “We do need to put Social Security back on a firm foundation for the future.”

“It is really stupid to wait to do that,” Rivlin said during a budget and health care conference sponsored by the Center for Strategic and International Studies. “We need to assure people currently in the labor force and entering into it that Social Security will be there for them and that they can plan around it.”

But tampering with Social Security is a high risk political venture certain to rile older Americans and seniors’ advocacy groups including AARP, and President Obama and Republican presidential nominee Mitt Romney have had little to say about it throughout the campaign.

David Axelrod, Obama’s chief political adviser, said last week that “The reality to Social Security is this is a much less imminent problem than Medicare.”

“We’ve extended the life of Medicare by close to a decade with the changes that Governor Romney wants to repeal. But Social Security is a more distant problem. One that needs a solution, but it isn’t as pressing as the Medicare issue.”

Two weeks ago, however, Obama, in a satellite speech to the AARP convention in Virginia,  revived a 2008 campaign proposal to have workers pay Social Security taxes on up to $250,000 of income. At present, only the first $110,000 of income is taxed.

Romney has voiced interest in making changes to the system that would put it on a long term course of sustainability. Earlier this year, he said that for  the people who are already retired or 55 years of age and older, nothing changes. But for younger Americans, he said he would raise the retirement age by a year or two and  “lower the rate of inflation growth in the benefits received by higher-income recipients and keep the rate as it is now for lower income recipients.”

People with higher earnings pay more in Social Security payroll taxes than do lower-earning participants, and they also receive larger benefits. Because of the progressive nature of Social Security's benefit formula, replacement rates—the amount of annual benefits as a percentage of average annual  lifetime earnings—are lower, on average, for workers who have had higher earnings.

Campaigning last week  in Florida, home to many retirees, Vice President Joe Biden charged that Republican Mitt Romney’s tax plan would result in higher taxes for Social Security recipients. “Well, if Governor Romney's plan goes into effect, it can mean that everyone — every one of you, would be paying more on — taxes on your Social Security,” Biden said in Boca Raton. “The average senior would have to pay $460 a year more in tax for their Social Security.

Romney has not proposed these higher taxes, and a spokesman said he would not increase taxes on Social Security benefits. But he also hasn’t said precisely  how he would offset the cost of his proposed 20 percent across-the-board cut in income-tax rates, which has created an opening for the Obama team to theorize on how he would cover the lost revenue without raising the deficit.