Busting Social Security myths
Social Security trustees' latest report echoed warnings by the nonpartisan Congressional Budget Office (CBO) that the program is financially unsustainable without changes. Yet many try to downplay these red flags, claiming such warnings are exaggerated to justify deep cuts in benefits. To have a constructive discussion, it is important to dispense with several myths.
1. Social Security does not face a significant funding shortfall.
The aging of society and increased life expectancy is placing a growing burden on the system, which began with 16 workers for every retiree. That ratio, now three workers per retiree, will be two workers per retiree by 2035. The CBO projects that maintaining promised benefit levels will result in spending on Social Security benefits increasing from 4.9 percent of gross domestic product in 2013 to 6.4 percent of GDP by 2035 and 6.9 percent by 2089 while revenues remain constant at approximately 4.5 percent of GDP. The Social Security trust fund will be drawn down rapidly to cover these growing costs. Once it's depleted in the early 2030s, Social Security will have to pay benefits from revenues coming in; all beneficiaries would see an immediate 23-percent cut in benefits.
2. Social Security has nothing to do with the deficit.
Social Security has been paying out more in benefits than it collects in revenues since 2010. Its cash-flow deficit will add $75 billion to the deficit in 2014, $1 trillion over the next decade and $3.8 trillion in the following decade. Past surpluses do not change very real current cash deficits. The government will have to borrow more to redeem Treasury bills held by the trust fund to cover the system's cash-flow deficit.
3. Social Security is good for now; we can make adjustments later to fix it.
As the largest government program, Social Security is like an ocean liner — it cannot turn on a dime. Changes should be phased in gradually to give workers time to prepare. Reductions necessary to restore solvency entirely through changes in benefits for new retirees will be 50 percent greater in 10 years — or four times greater if we wait until 2030 — than they are today.
4. Reforms to restore solvency would cut benefits.
Social Security benefits are indexed to wage growth, which increases faster than inflation. As a result, future retirees' initial benefits will be higher than current beneficiaries', even after adjusting for inflation. In addition, increasing life expectancy means future retirees will receive benefits for more years, resulting in more generous lifetime benefits. Under current law, the average lifetime benefit would double in real terms over the next 75 years. Solvency plans that include benefit “cuts” still result in future retirees receiving higher initial and total benefits than current retirees.
5. Raising taxes on the wealthy can provide a pain-free fix.
Increasing the cap on wages subject to Social Security taxes, currently $117,000 annually, would improve finances but would not eliminate the shortfalls facing Social Security, in part because a portion of the increased revenues would finance higher retirement benefits for wealthy individuals. The CBO recently estimated that eliminating the cap on taxable earnings while preserving the current benefit structure would close less than half of the 75-year shortfall. More would be closed if workers were not credited for increased contributions, but that would break Social Security's fundamental link between benefits and contributions.
Decisions on closing Social Security's shortfall must also be made in the context of competing claims on increased revenues, from health care to infrastructure, education and debt. Enacting a sufficient Social Security revenue increase would make it more difficult to increase revenues for other purposes and represent a judgment that preserving 100 percent of all seniors' scheduled benefits is a higher priority than other needs.
There is plenty of room for debate, but it must begin with an honest acknowledgment of the problem's magnitude and the trade-offs involved in addressing it.
Maya MacGuineas is the CEO of the Committee for a Responsible Federal Budget.