Tuesday, April 7, 2009

USA Today: Recession adds urgency to Social Security fix

USA Today editorializes on the need for Social Security reform:

Our view on retirement: Recession adds urgency to Social Security fix

Vanishing surplus underscores need to ensure long-term solvency.

With 401(k)s and pension funds taking a hit recently, perhaps it should come as no surprise that Social Security is hurting as well. While the program is not invested in the stock market (as privatizers wanted to do), it is dependent on a steady stream of payroll tax revenue, which drops in times like these when large numbers of workers lose their jobs or see their income decline.

Preliminary damage estimates by the Congressional Budget Office aren't pretty. Projected Social Security surpluses over the next decade have all but disappeared. Next year's operating surplus, previously estimated at $86 billion, is now $3 billion. Ten years of cumulative surpluses, once seen at about $703 billion, are now projected at $83 billion.

In short, the long-predicted Social Security crisis is arriving sooner than expected, underscoring the need to ensure the program's long-term solvency now. The global recession, and the losses in other forms of retirement savings, may appear to provide a reason for delaying unpleasant reforms yet again, but this is actually an ideal time to act.

Each year that the U.S. government fails to address its massive retirement and health care obligations raises the prospects of it defaulting on its debts, inflating its way out of them, or imposing punitive taxes to pay them off any of which would cause greater misery than the changes needed to stabilize the system. A commitment to shore up Social Security would serve as a clarion statement that the U.S. economy is a sound long-term investment.

It would also give confidence to ordinary Americans that Social Security will be around when today's young and middle-aged workers retire.

For all the talk about "trust funds," Social Security essentially operates on a cash-in, cash-out basis. And once the amount being paid out in benefits exceeds the amount coming in — now expected in 2017 — the government will have to borrow billions of dollars to cover the difference.

Compared with solving the health care problem, Social Security should be a walk in the park. As a program it works just fine, but it is unsustainable as the result of increasing life spans, rising benefits, and the aging of Baby Boomers. In 1935 the average retiree lived about 13 years after the age of 65. Today the average is 19.5 years.

Preserving Social Security for the long term isn't that complicated. It can be done by gradually raising the retirement age for able-bodied workers, curbing growth in benefits and making high-income workers pay more payroll taxes. The longer a solution is delayed, the more painful it will become.

Early this year President Obama signaled an interest in addressing the problem. And a bipartisan group of senators began discussing a plan to fix the program, largely by enticing people to stay in the workforce longer.

House Democrats shot this effort down. In addition to the normal reluctance to taking a tough but necessary stand, they reasoned that responsible action would undermine some of the political gains they made after President Bush's unpopular bid to partially privatize the program in 2005.

Maybe so, but the numbers don't lie. Social Security is in trouble. The recession is a reason to fix it now, not an excuse for further delaying the inevitable.


John Bailey said...

Social Security can't be treated as an independent problem. Social Security payments may be covered by payroll taxes for a year or two, but after that, payment of benefits will depend on other tax collections.

Medicare already depends on other tax collections.

Both programs have to compete with on-going government programs as well as other government guarantees, including the public debt, deposit guarantees, mortgage guarantees, Medicaid, Federal pensions, etc.

Jim Glass said...

That's an excellent point.

Social Security has been "the third rail of politics" only because it has a dedicated funding source until now.

But once it has to go into general revenue pay off the trust fund bonds (around 2019) it will be heading into direct competition with all the interests groups that survive off of general revenue.

The Pentagon ... all the farmers lobbying for agricultural subsidies ... advocates for welfare for the truly poor ... the public education lobby -- they are all going to want that same money. And it is going to be in an era of massive fiscal crunch when there's a lot less money to go around, so they all are going to be motivated to fight for it.

It's very easy to imagine political arguments along the line of...

"Why should we be using 2 points of GDP of income taxes to redeem those SSTF bonds to pay transfers from the poorer to 'the rich', like Bill Gates, the Walton Family, Kevin Costner, Alex Rodriquez, Paul Krugman, etc., when that money could be much better used to protect the nation from its enemies ... save the farmer's way of life ... aid the truly needy poor ... educate our children...?"

What's Krugman going to say then? "Hey, taxes to fund transfers from the poor to the rich are progressive when the rich be me!"

Third rail no more.