Tuesday, September 29, 2009

The Today Show Discusses Social Security Reform

Money Magazine writer Janice Revell discusses Social Security reform on the Today Show. Here's the clip, much of which is quite good, but there are a couple items on Social Security reform I think are worth fact-checking.

Revell first says, "The truth of the matter is the Social Security system is not going broke, it is in far better shape, really, than you probably expect … I think what makes it safe, if you look at the actual numbers if the government did absolutely nothing and said you're on your own people for the next 30 years there would be enough money in the system to pay full benefits. Even after that, there would be enough money for decade and decades to pay very high benefits."

In a sense she's clearly correct: the program is current solvent through the late 2030s and will be able to pay around three-quarters of promised benefits thereafter. But the problem of paying for Social Security – which is a problem for the government, and therefore a problem for you and me – begins in just a few years. And that burden will be large: by 2025 Social Security will run a deficit equal to around 1 percent of GDP; the deficits will continue and increase in perpetuity thereafter. This means that, in addition to tackling the even larger cost of fixing Medicare, the government will need to dedicate an extra 5 percent of its resources to Social Security. Entire cabinet departments don't take up that much money, so unless we want to raise taxes even more we'll need to make some changes.

Revelle then says that there is plenty of time for the government to get on top of the problem and that reform will probably constitute some minor increase in payroll taxes and some taxation (meaning, presumably, reduction) of benefits. Let's think about this:

If we wanted to fix Social Security permanently today by raising taxes, we'd need to increase the payroll tax rate from 12.4 percent to around 15.8 percent, a 27 percent increase in what is already the largest tax paid by most workers. Again, that's the amount if we acted today and if we wanted with reasonable certainty not to have to raise taxes again in the future. If we put reform off, as Congress has a tendency to do, then the costs get even bigger.

It's all in the eye of the beholder, but the numbers seem a bit more sobering than Ms. Revelle's description of them should warrant.

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