Social Security: Getting Serious
Click here for a printer-friendly version of this article
Numerous sources indicate that the National Commission on Fiscal Responsibility and Reform, which President Obama created by executive order in February, will take a serious look at Social Security reform. Given the demagoguery to which the Social Security issue has been subjected in recent years, we are skeptical that a few months of earnest effort by commission members will be sufficient to get the reform train moving at last. But we would applaud any such effort and encourage support of proposals that make real headway on the problem.
A critical prerequisite for action is a realistic look at program finances. With millions of baby boomers starting to head into retirement, Social Security is beginning to feel some long-anticipated financial strains. Unfortunately, due to the recession, Social Security is now sitting on much shakier ground even before most of the baby boomers have hit the rolls.
In calendar year 2009, Social Security’s cash surplus was a thin $3 billion – virtually a rounding error in a program with $685 billion in annual outlays. In fact, collections of payroll taxes on workers actually lagged behind benefit payments last year: Social Security’s small surplus was made possible only by the taxation of benefits that supplements payroll taxes.
There’s been a lot of talk lately about the progress of our economic recovery. If there is indeed a recovery underway, Social Security has yet to get a glimpse of it. As rough a year as 2009 was for Social Security, 2010 is shaping up to be worse. The graph below shows how Social Security’s monthly balances remain persistently weaker than one year ago.
This graph reveals why the Congressional Budget Office (CBO) anticipates that 2010 will be a deficit year for Social Security. In every single month over the last year, program operations have been weaker than the corresponding month from the previous year. In fact, the March-to-March decline in Social Security’s monthly balance is larger than CY2009’s entire annual surplus. At this rate, it would take a miracle for Social Security to stay out of the red in 2010.
Social Security is likely to show a temporary improvement in its monthly balance when the April data are recorded. This reflects the fact that payroll tax collections tend to peak in January and April every year. Unfortunately, this is likely to be the high point for Social Security in 2010; it will almost certainly be all downhill from there.
How bad are things for Social Security right now? For some perspective, it might be worth remembering the great Social Security debate of 2005.
In 2005, the Bush Administration proposed that a portion of projected Social Security payroll taxes be saved in voluntary personal accounts. There was a fierce debate over the larger fiscal effects of this proposal, but most analysts agreed on the basics: in the near term, the Administration’s proposal would increase pressure on Social Security finances, because payroll tax revenues would be used to fund personal accounts in addition to financing current benefit payments. In the long term, annual program operations would improve, because every dollar of benefits financed today would be a dollar that future taxpayers would not need to cover.
A fierce controversy erupted over whether it made fiscal sense for the federal government to assume the “transition cost” of shifting to partial pre-funding through personal accounts. According to some of the more hysterical commentary heard at the time, even the establishment of modestly-sized personal accounts would amount to a fiscal Armageddon for Social Security.
Some details about the actual size of that “transition cost” are worth recalling now. The CBO projected that, even if the Administration’s proposed accounts had been financed entirely with new debt, the total additional pressure on the budget would have amounted to just $12 billion in 2009 and $29 billion in 2010. And even though all of these personal account investments would have been devoted to funding future Social Security benefits, these figures produced howls of anguish about the allegedly devastating effects on Social Security finances.
So five years after that debate, where are we now? Well, the recession has had a much more severe impact on Social Security finances than anything alleged by the harshest opponents of President Bush’s plan. The 2008 report by the trustees of the Social Security trust fund projected a 2009 cash surplus of $87 billion. Thereafter, that surplus declined by a full $84 billion, resulting in an actual surplus of a mere $3 billion. The same 2008 report projected a 2010 surplus of over $88 billion. Now we’re facing a likely 2010 deficit – and thus possibly a total decline of more than $100 billion in a single year relative to the 2008 projection.
Remember too that any additional near-term fiscal pressures under President Bush’s proposal would have been in the service of improving annual program operations over the long term. The same, obviously, cannot be said of the worsening near-term finances attributable to the current recession, which offers no upside for future Social Security finances.
By any measure, Social Security is in far worse shape today than predicted in 2005, with or without President Bush’s reform plan. Those who raised the greatest concerns about “transition costs” in 2005 should be apoplectic over Social Security’s severely worsened finances.
Strangely enough, there is nearly total silence from those quarters. Many of the same voices who loudly decried President Bush’s proposal for the enormity of its “transition costs” are now in a state of professed calm over Social Security finances. Indeed, some are attacking President Obama’s Fiscal Responsibility Commission even for examining reforms to shore up the program.
In 2005, the National Committee to Preserve Social Security and Medicare (NCPSSM) asserted that personal accounts would “drain the Social Security Trust Fund.” Now that the Trust Fund has been drained far more by the ongoing recession, NCPSSM blithely asserts, “Social Security is not the trouble; it’s the target.”
Virginia Reno of the National Academy of Social Insurance (NASI) previously referred to President Bush’s personal account proposal as being part of a “movement to dismantle Social Security”, and fed perceptions that the cost of financing personal accounts would lead to “benefit cuts.” In recent months, however, as Social Security’s finances have been sagging, Ms. Reno has been writing papers about ways to increase Social Security benefits. Small wonder that economist Jeffrey Brown recently referred to NASI as the “National Academy of Spending Irresponsibly.”
One cannot help but wonder why Social Security’s recent turn for the worse, dwarfing anything projected during the 2005 reform debate, is not now being rhetorically tied to the terrible fiscal effects and benefit reductions that many were all too happy to allege about President Bush’s proposals.
In reality, President Bush proposed a more progressive Social Security system, fortifying protections for low-income workers. He received very little credit for this position from those now asserting that benefits for low-income Americans can painlessly be increased, despite Social Security’s far weaker current finances.
Unfortunately, someone inclined to question motivations might wonder whether politics had more than a little something to do with the invective directed at President Bush’s 2005 Social Security proposal, since many of those people are now shrugging off a much more serious threat to Social Security finances in 2010. And naturally, it’s much easier to attack someone else’s plan for fixing the program, than it is to face up to the politically difficult choices of developing a plan of one’s own.
But Social Security won’t be fixed merely by decrying political opportunism. It can only be fixed by getting serious about substantive realities and with each other.
In recent years, many politicians and advocates have had great fun using Social Security as a political football – painting absurdly rosy pictures of the program’s health, and fear-mongering about the effects of reform. To get anywhere going forward, there will need to be a political amnesty of sorts; we can’t afford to exclude everyone from the negotiating table who has been less than forthright about Social Security in the past. Indeed, there wouldn’t be many elected officials left to negotiate if we did.
What we do need to leave behind is the bad behavior. And that means taking a clear look at how precarious Social Security’s finances have recently become, and acting to repair the situation before it becomes even worse.