No, Social Security’s Annual Report Doesn't Show That We Should Expand Benefits

The Medicare and Social Security Trustees report came out last week. On the Social Security front, the main story is this: We are one year closer to the insolvency of the overall program since the overall insolvency date has remained the same as last year; 2034.

A few highlights:

1) Since 2010, Social Security has been running a constant cash-flow deficit – taxes collected for the program aren’t enough to cover the benefits paid to retirees. To fill the gap, the program is drawing from the trust fund (first using the interest paid on the bonds in the fund, then their principal) to keep payments to retirees going. In concrete terms, Treasury is borrowing money to pay back the trust funds. But that won’t last forever.

2) Under the current projections, the combined Trust Funds will be fully depleted by 2034. That means that in 2034, by law, benefits will be seriously cut. According to the Peterson Foundation, we are talking about a 21 percent affecting 88 million people. Over at The Hill, Maya McGuineas as a good way to illustrate what this means. She writes that 2034 is ​”when today’s 49 year-olds reach the normal retirement age and today’s youngest retirees turn 80.” Not good.

The Social Security’s Disability Insurance Trust Fund will be dry by 2023. When that happens 12 million people will be affected by an 11 percent cuts to their benefits.

While there are debates about how the cuts will be implemented (cuts across-the-board or  the program will only pay benefits once it has collected enough taxes to pay the benefits in full), one thing is sure; the people affected the most will be the ones at the bottom of the income distribution. For that reason alone I can never comprehend why Democrats are not eager to find a solution that is not just a replay on their one and only policy prescription to raise taxes on the rich. 

3) Talking about Democrats, I have seen some of them argue that the Trustees report proves that we can increase benefits. See for instance this priceless piece. Really? The cost of the program is increasing by 20 percent while the Social Security’s long term actuarial deficit is up by 33 percent since 2009. Also, AEI’s Andrew Biggs notes that when president Obama took office, the program faced a 75-year shortfall of 2 percent and it is now up to 2.66 percent. It is a small improvement form last year’s 2.68 percent. Here is what my colleague Mark Warshawshy explains the change:

The unfunded obligation of the program, whether calculated over 75 years or over an even longer horizon, increased more this year than was expected. This is due to a realistic lowering by the Trustees of the future interest rate assumed. Further changes to reflect the best informed views on current and projected economic and demographic conditions, including for future mortality trends—in particular to better consider recommendations by the 2015 technical panel of external experts—no doubt are waiting on the participation of Public Trustees, whose positions are currently vacant.  

Democrats’ only plan to tax they way out of the current funding gap won’t be enough unless they are willing to tank the economy with crazy tax hikes to get there. And Biggs adds:

And progressives’ favored way of fixing Social Security, lifting or eliminating the “cap” on earnings subject to payroll taxes, won’t cut it anymore: even eliminating the payroll tax ceiling, a step that would effectively increase the top marginal tax rate on earned income by 12 percentage points, would fix only 71% of the long-term funding shortfall. Almost no other developed country funds their pension system this way. Most levy payroll taxes only on earnings up to a cap and that cap is generally lower than the $117,500 we currently use in the U.S.

But Democrats are calling for increases in benefits. 

The truth of the matter is that Social Security is insolvent and the program shortfall is growing nearer and more difficult to solve — so much so that even the Obama administration trustees maintained language in the summary of the report to that effect.  

Incidentally, it worth noting that the author of the crazy piece mentioned above, Nancy Altman, was Alan Greenspan’s assistance on the bipartisan Commission which was tasked to solve the Social Security shortfall back in 1982. As you know the commission acted to reduce cost growth and increase taxes to close the shortfall then even though the actuarial imbalance at that time was 1.8% of taxable payroll, which is far less than today’s 2.66%. I bet you that if at the time of the Greenspan Commission, she or others had suggested it was time to expand benefits in the face of the program’s solvency problem they would have been laughed out of the room. Boy, how times have changed.

It’s time to reform entitlement spending and Social Security in particular. A first step would be to acknowledge that we need to move away from the entitlement system to a real safety net system. That’s a system where the middle-class and higher-income earners would save for their retirements rather than expecting benefits from the government. Besides, the data show that apart from low-income Americans, U.S. retirees are not as dependent on Social Security as many seem to think. To that end, I agree with Biggs that “the federal government should work to expand access to retirement saving plans such as 401(k)s and help people sign up. But if ever there were a case for letting households rather than government do a job, this is it.”

If the government is providing a safety net rather than the current system, it means that benefits shouldn’t be based on age, but instead based on need. Such a radical shift would actually free resources to improve Social Security protections for low-earning households. Needless to say, I am not holding my breath.