Social Security Reform Requires Political Will

Yesterday, the Committee for a Responsible Federal Budget released its analysis of the Social Security Trustees report. As in past years, the report shows that population aging and the mass retirement of the baby boomers will greatly increase the system’s costs, driving them well beyond payroll tax revenue and putting the system on the road to bankruptcy.
 
The current economic crisis, though, has made things markedly worse – especially over the short run. As we explain:
 
Last year’s report projected that Social Security would have large but declining surpluses over the next few years – $87 billion in 2009 and $510 billion over ten years – and would begin running cash-flow deficits in 2017. The new projections estimate that, because of declining revenue as a result of the shrinking economy, the 2009 surplus will be only $19 billion and the ten year surplus just $25 billion (although this is partially a factor of the passage of time), with deficits beginning in 2016.
 
The date of trust fund exhaustion also moved up, from 2041 to 2037. And the average shortfall over the next 75 years increased from 1.7 percent of taxable payroll to 2 percent.
 
As the report outlines, the program’s costs are projected to “increase from 12.35 percent of taxable payroll this year to 14.5 percent in 2020, almost 17 percent in 2040, and 17.75 percent by 2085. At the end of the 75-year valuation period – in 2085 – the program is projected to face a shortfall of about 4.4 percent of payroll.” If not addressed, these large deficits threaten to be a huge burden on the rest of government, and will ultimately leave the system unable to fully pay benefits.
 
The options available to close Social Security’s deficits are well-known and straight forward. In fact, we included a detailed table showcasing many of them – including what percent of the fiscal gap they would close.
 
Pick and choose what you think are the best options! For example: raising the retirement age to 70, using the “chained-CPI” to calculate cost of living adjustments, and raising the payroll tax cap to cover 90% of earnings would get you most of the way there — although more work would be needed to address later years.
 
Of course, none of these choices are painless. Raising the retirement age forces people to either work longer or accept lower benefits – and it may be the poor and working class who are least able to accept either of these alternatives; reducing cost of living adjustments (COLAs) means only small changes for the recently retired, but would result in significant cuts for the oldest – and in many cases most vulnerable – seniors. And raising the payroll tax cap puts a very large marginal tax increase (12.4%) on a small group of people for whom it might be a significant burden or even a work (or wage) disincentive. Other options have their own risks and disadvantages.
 
The real obstacles to reform, though, are political. No politician wants to raise my taxes or reduce your benefits. The politics of Social Security reform are quite complicated, and something I will discuss at length later.
 
In the meanwhile, we should be encouraging our elected officials to move beyond these politics, and do the right thing for the American people.