The debate over Social Security reform is careening off track. Both sides of the partisan divide have dug in their heels and fallen back on ideological talking points rather than engage in a substantive dialogue about the system's looming problems. The danger is that we will end up with a duel between the "do nothing" camp and the "free lunch" camp. Both offer a false hope and neither confronts the hard choices that a meaningful plan requires.
To frame the issue, it is important to step back and define exactly what problem we're trying to solve. Simply put, the current system faces a growing imbalance between what it promises in benefits and what it is set to receive in revenue.
Harry Zeeve is the National Field Director for The Concord Coalition, a nonpartisan, grassroots organization that advocates fiscal responsibility.
As our population ages, fewer workers are available to pay taxes for the programs that support retirees. This imbalance is expected to last far beyond just the retirement of the baby boom generation because after the boom, birthrates substantially declined and are not expected to go back up. At the same time, people can expect to live longer than ever before.
The only way to balance the system, without burdening future generations by adding trillions of dollars to our already substantial national debt, is to either cut benefits or raise revenues — solutions anathema to one side or the other in the current political divide.
So, is there a crisis right now? No, but the seeds of a crisis are sown. Benefits are not immediately threatened and actually, Social Security currently takes in more in FICA taxes than it pays out, with the surplus funds invested in government treasury bonds. However, in about 12 years, Social Security will begin to pay out more in benefits than it collects in taxes. Cashing in those bonds to meet the deficit will put great strain on the federal budget.
In essence, the bonds in the trust fund are IOU's from one section of the government to another. Just looking at the year 2040, the last year of the trust fund's "solvency," redeeming the bonds will require the government to come up with $353 billion. That amount is more than the total of all 2004 non-defense appropriations not counting spending on veteran's benefits and homeland security. In the 35 years between 2017 and 2041, the cash shortfall in Social Security will total $4.4 trillion in today's dollars.
Also by 2040, the Social Security Trustees project that the program's cost will be about 6.3 percent of economic output in the country (GDP), up from about 4.3 percent today. Expressed as a share of workers pay (taxable payroll), Social Security will grow from 11 percent to 17.5 percent — meaning that Social Security will require around 60 percent more from worker's wages than it does today.
This problem cannot be wished away. Do private accounts or the trust fund change the equation? No, neither private accounts nor the trust fund bonds do anything to ease the fiscal strain Social Security's growth is likely to place on the economy. Despite the highly charged rhetoric, there is a broad consensus on those points.
There is also general agreement (behind closed doors) on the basic steps that must be taken to fix the program's problems, i.e. some combination of reduced benefit promises and higher revenues. Furthermore, it is widely acknowledged that other entitlement programs, like Medicare, will also increase in size as the population ages and are even larger and more daunting problems.
The Social Security debate should provide an opportunity to help future generations out of a fiscal mess, while also allowing the political system to move on and deal with a health care system far more problematic with larger potential burdens for future generations.
Unfortunately, Republicans and Democrats are talking past each other when it comes to solutions and neither is explaining how they would close the gap between Social Security's revenues and its benefit promises. Those who argue that we have no problem until the trust fund runs out overlook the fact that the government's overall fiscal position could become untenable long before then. Similarly, those who advocate large scale borrowing to fund personal accounts overlook the fact that new borrowing may well hasten our plunge over the fiscal cliff.
Any genuine reform plan carries with it a fiscal cost. Whether through increased taxes or through constrained spending (or a combination of the two), major action by lawmakers will be necessary. The sooner we take action and seek a compromise that recognizes the vital role that Social Security plays in the lives of many Americans while also acknowledging that the program needs to change to meet the challenges of an aging society with a declining workforce, the more effective it will be.