Failing to Grasp the Social Security Problem

There are a number of persistent memes coming from one side of the aisle about the future of Social Security and what, if anything, needs to be done about it to right the nation’s fiscal ship. Some are clearly hyperbolic, such as the oft repeated story about how certain politicians want to “throw old people out in the streets so we can give tax cuts to the rich.” That may win some points come election time, but it’s not based in reality.

A second, and perhaps more damaging theme, is demonstrated again this week by Steve Benen at The Washington Monthly. Of the four biggest items presenting budget challenges to the nation, Steve goes so far as being willing to admit that, “Medicare is facing fairly serious fiscal problems.” (Thanks for that, by the way.) But then follows it up with the all too common song and dance claiming that Social Security is just fine. Nothing to see here. Move along.

To do so, he quotes Kevin Drum in a favorable light.

The weird thing about this is that Social Security isn’t even hard to understand. Taxes go in, benefits go out. Unlike healthcare, which involves extremely difficult questions of technological advancement and the specter of rationing, Social Security is just arithmetic…. Right now, Social Security costs about 4.5% of GDP. That’s going to increase as the baby boomer generation retires, and then in 2030 it steadies out forever at around 6% of GDP.

That’s it. That’s the story.

He then goes on to explain that if Social Security does mysteriously become a problem, there’s a quick and easy fix for it. Can you guess what it is?

Our choices are equally simple. If, about ten years from now, we slowly increase payroll taxes by 1.5% of GDP, Social Security will be able to pay out its current promised benefits for the rest of the century. Conversely, if we keep payroll taxes where they are today, benefits will have to be cut to 75% of their promised level by around 2040 or so. And if we do something in the middle, then taxes will go up, say, 1% of GDP and benefits will drop to about 92% of their promised level.

That’s right. We’ll just jack up the taxes to cover it. (*sigh*)

What’s missing from this cogent analysis is the real problem with the current Social Security system. Kevin points out that, “taxes go in, benefits go out.” And to a point, that much is true. What he fails to note is that for many decades now, the system has taken in more than it pays out each year. (With a few recent exceptions.) The surplus revenue is immediately raided by Congress for the general fund and replaced with low interest Special Issue Treasury Bills, which represent nothing more than a huge stack of IOU’s that the government owes itself.

As soon as the situation permanently flops the other way – with the system taking in less than it pays out – not only will we no longer be able to raid that extra money to fund the current budget, but we will have to pay back the shortfall out of those IOU’s, leaving Congress with not only less money to work with, but a very large and very critical bill come due. The more the shortfall accelerates, the more the pinch is felt in the federal pocketbook at more than double the rate.

And taxing your way out of this problem isn’t going to work. Particularly when we have members already looking at enhanced federal revenue streams – read taxes – to cover the rest of our sins. Yes, the Social Security problem can be fixed far more easily than tackling the rest of the entitlement issues and defense spending, but it needs to be done now, not later. And it’s going to take some adjustments in benefits, retirement age and more to keep the system from turning into a vampire that sucks the treasury dry before the baby boomer gap finally winds down.

This sort of head in the sand thinking isn’t going to solve anyone’s problems. And pretending it will in order to curry votes from seniors with hyperbolic threats will not win the future. Wake up. The wolves are at the door.

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