Social Security: A small problem that will grow bigger

The small gap in Social Security is projected to increase over time, making a strong case for reforming the system sooner, rather than later.

By , Guest blogger

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    In this Aug. 5 photo, Paul Skidmore stands at his home in Finksburg, Md. Skidmore plans to file for Social Security benefits three years earlier than expected, now that his unemployment benefits are exhausted. Social Security is facing its first-ever shortfall this year as a wave of people like Skidmore opt to collect payments before their full retirement age. The long-term outlook for Social Security isn't good either, and some are calling for reform now to close the gap in the fund sooner rather than later.
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The Trustees’ reports on the status of the Social Security and Medicare programs came out last week, and the reports underscore two “big picture” points:

  1. Of the two programs, Medicare faces much larger fiscal challenges than does Social Security, because Medicare has both demographic factors and rising per capita health costs working against it; and
  2. If health care reform is to significantly help the outlook for Medicare, some tough choices prescribed in the reform bill and in the rest of current law will have to be followed through on.

Let me put aside point #2 for now. It’s a point the Concord Coalition has made before regarding health care reform, underscored by CBO’s long-term outlook report as well, in the difference between their “extended baseline” (not so scary) scenario versus their “alternative” (very scary) scenario.

On point #1, the contribution of the Social Security program to the overall fiscal gap is expected to be relatively small over the coming decades–with the difference between annual program income (without interest) and annual program cost staying close to 1 percent of GDP within the 75-year long-range window under “intermediate” assumptions, as can be seen in Figure II.D5 above from the Trustees’ report. (Over the last half of the period the gap grows steadily from just over 1 percent to closer to 1.5 percent–reaching 1.44 percent by 2085; see details in table VI.F4 here.)

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Some suggest that if Social Security contributes so little to the fiscal gap relative to Medicare, then why do we have to talk about reforming Social Security? (In fact, CBO doesn’t even vary their current-law assumptions about Social Security in considering their two different fiscal scenarios.) The argument is often that if Social Security is not really “the problem” (at least not the big part of the problem), then why pick on it?

The trouble is that it’s often impossible to simply “undo” the causes of the problem–and given that we “can’t get back there from here,” we have to learn how to “deal with it” and move on as best we can. In the case of the fiscal challenges posed mostly by uncontrolled growth in health care spending, it’s highly unlikely that we will be able to close the gap in the health care programs just by (even major) health care reform alone. And even if it were theoretically possible, we’d be unlikely to choose those policy changes given their likely implications for the quality of health care and quality of life.

On Social Security, it’s a small gap, but it’s one that’s much easier to close, both theoretically and in practice. Closing the gap is certainly not “fun” and does involve sacrifice. We would not want to do it right away in any way that would place undue burdens on current retirees and lower-income workers, especially given the currently-still-weak economy. But there are many different options available to immediately improve that 75-year outlook on Social Security without immediately burdening anyone. (The Committee for a Responsible Federal Budget just released this nice summary of the Social Security Trustees’ report including a very helpful compilation of Social Security reform options.)

And although the Social Security Trustees’ report does not get into specific policy options to close the (small) gap in Social Security, they do make the point that even small problems have a tendency to get larger over time (in this case because the demographic challenge just keeps growing), and closing that gap sooner–even with a plan that is phased in very slowly over time–would be easier than closing it later. From the conclusion of the report’s overview (emphasis added):

Over the full 75-year projection period, the actuarial deficit estimated for the combined trust funds is 1.92 percent of taxable payroll?—?0.08 percentage point smaller than the 2.00 percent deficit projected in last year’s report. Solvency of the combined OASDI Trust Funds for the next 75 years could be restored under the intermediate assumptions if increases were made equivalent to immediately and permanently increasing the Social Security payroll tax from its current level of 12.40 percent (for employees and employers combined) to 14.24 percent. Alternatively, changes could be made that are equivalent to reducing scheduled benefits by about 12.0 percent. Other ways of reducing the deficit include transfers of general revenue or some combination of approaches.

If no substantial action is taken until the combined trust funds become exhausted in 2037, then changes necessary to make Social Security solvent over the next 75 years will be concentrated on fewer years and fewer generations:

For example, payroll taxes could be raised to finance scheduled benefits fully in every year starting in 2037. In this case, the payroll tax would be increased to about 16.1 percent at the point of trust fund exhaustion in 2037 and continue rising generally thereafter, reaching about 16.7 percent in 2084.

Similarly, benefits could be reduced to the level that is payable with scheduled tax rates in each year beginning in 2037. Under this scenario, scheduled benefits would be reduced 22 percent at the point of trust fund exhaustion in 2037, with reductions reaching 25 percent in 2084.

And regarding the argument often made that we can afford to put those reforms off to future generations, well, even if we made the above changes anytime between now and 2037, the Trustees’ report explains that we wouldn’t be done–that there would be plenty more for future generations to worry about once we get to that next place we’re kicking the can to:

Either of these actions would eliminate the shortfall for the 75-year period as a whole by specifically eliminating annual deficits after trust fund exhaustion. Based on the assumption of continued increase in the average age of the population after the 75?year period (due to expected improvement in life expectancy), Social Security’s annual cost will very likely continue to grow faster than scheduled tax revenue after 2084. As a result, ensuring solvency of the system beyond 2084 would likely require further changes beyond those expected to be needed for 2084.

So Social Security reform isn’t absolutely “easy”–but it is certainly relatively easier to do than health care reform, and it’s even easier the sooner we do it.

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