When the Social Security Trustees recently released their report on the financial condition of Social Security, they echoed the warnings made by the nonpartisan Congressional Budget Office that the program is financially unsustainable without changes. Yet, there are many voices trying to downplay these red flags, claiming that warnings about the financial problems facing Social Security are exaggerated to justify deep cuts in benefits. To have a constructive discussion about the future of the Social Security program, it is important to dispense with several myths.
SOCIAL SECURITY DOES NOT FACE A SIGNIFICANT FUNDING SHORTFALL
The aging of society and increased life expectancy is placing a growing burden on the Social Security system. When Social Security began, there were 16 workers for every retiree. That ratio is now three workers for every retiree, and it will be two workers for every retiree by the year 2035. CBO projects that maintaining promised benefit levels will result in spending on Social Security benefits increasing from 4.9 percent of gross domestic product in 2013 to 6.4 percent of GDP by 2035 and 6.9 percent of GDP by 2089 while revenues remain constant at approximately 4.5 percent of GDP. The program will rapidly draw down balances in the Social Security trust fund to cover these growing costs. Once the trust fund is depleted in the early 2030s, Social Security will be forced to pay benefits with the revenues coming into the program, covering about 77 percent of promised benefits. All beneficiaries, including those already receiving benefits and low-income workers with benefits at the poverty level, would see an immediate 23 percent cut in benefits.
SOCIAL SECURITY HAS NOTHING TO DO WITH THE DEFICIT
Social Security has been paying out more in benefits than it collects in revenues since 2010. Social Security’s cash-flow deficit will add $75 billion to the deficit in 2014 and $1 trillion over the next decade, and $3.8 trillion in the following decade. The fact that Social Security trust fund has a balance of over $2.8 trillion means that through the 2030s this contribution to larger deficit is essentially “paid for” with past contributions to smaller deficits. There is some question in the academic community as to whether Social Security’s past surpluses were “saved” in any economic sense. Regardless, the programs past surpluses do not change its very real current cash deficits. The federal government will have to borrow more to redeem the Treasury bills held by the Social Security trust fund to cover the system’s cash flow deficit.
SOCIAL SECURITY IS GOOD FOR NOW AND WE CAN MAKE ADJUSTMENTS LATER TO FIX WHAT AILS IT
As the largest government program, Social Security is like an ocean liner – it cannot turn on a dime. Changes should be phased in gradually to give workers time to adjust and prepare for the changes. If reforms are enacted soon, much smaller changes can be spread over more years and more generations, and room exists to enact improvements for those who need it most. If we wait until trust fund depletion is imminent, the program will be running annual shortfalls of approximately $500 billion and closing the shortfall will require large and abrupt changes in benefits and taxes. The reductions necessary to restore solvency entirely through changes in benefits for new retirees will be 50 percent greater in 10 years than would be necessary today and will be more than four times greater if we wait until 2030.
REFORMS TO RESTORE SOCIAL SECURITY SOLVENCY WOULD CUT BENEFITS
Social Security benefits are indexed to wage growth, which increases faster than inflation. As a result, initial Social Security benefits for future retirees will be higher than they are for current beneficiaries even after adjusting for inflation. In addition, increasing life expectancy means future retirees will receive benefits for more years, resulting in much more generous lifetime benefits. Under current law, the average lifetime benefit would double in real terms over the next 75 years. Social Security reform plans that include “cuts” in Social Security benefits to restore solvency simply scale back part of this increase yet still result in future retirees receiving higher initial benefits and total lifetime benefits than current retirees.
Moreover, major Social Security reform proposals such as the Simpson-Bowles and Domenici-Rivlin plans include provisions that would increases benefits for low-income workers and the very old and long-term disabled most at risk of outliving their retirement savings. But for the reasons noted above, the ability to provide increased benefits in a Social Security solvency plan will become more difficult if we fail to act soon.
RAISING TAXES ON THE WEALTHY CAN PROVIDE A PAIN-FREE FIX FOR SOCIAL SECURITY
Increasing the cap on wages subject to Social Security taxes, currently set at $117,000 of wages annually, would improve Social Security’s finances but will not eliminate the shortfalls facing Social Security, in part because a portion of the increased revenues would go to finance higher benefits for wealthy individuals when they retire. CBO recently estimated that eliminating the cap on taxable earnings while preserving the current benefit structure would close less than half of the 75-year shortfall. A greater amount of the shortfall would be closed if workers were not credited with benefits for the increase contributions, but that would break the link between benefits and contributions – a fundamental element of Social Security since its creation.
The decision about how to close the shortfall facing Social Security must also be made in context of competing claims on increased revenues, from financing growing health care costs to investing in infrastructure and education to keeping debt levels under control. Enacting a revenue increase sufficient to close a funding gap of 1.4 percent of GDP would make it more difficult to increase revenues for other purposes and would represent a judgment that preserving 100 percent of scheduled benefits for all seniors is a higher priority for increased revenues than other needs.
There is plenty of room for debate about the best approach to addressing the financial challenges facing Social Security. But that debate must begin with an honest acknowledgment of the magnitude of the problem and the trade-offs involved in addressing it.
Maya MacGuineas is the CEO of the Committee for a Responsible Federal Budget.