On Saturday, Social Security turned 75 years old. AARP chapters around the country held corny birthday parties, but they didn't invite Stephen Goss, Social Security's chief actuary. That might have spoiled the fun.
Just a few days before, Goss and his team produced an annual trustees report acknowledging that, for the first time since 1983, the program has begun to run at a deficit-and, except for a few years in the near future, it would continue to run deeper and deeper in the red through its 150 anniversary and beyond. That's a heck of a depressing birthday present; it's also a pretty grim milestone if you one day were hoping to get a decent return on a lifetime of Social Security taxes.
I imagine you have some questions.
What's all this mean? Social Security used to draw more in taxes than it paid in benefits, which helped shrink the federal deficit. Now there's a shortfall in Social Security's cash flow, which means the system will make the deficit worse. To paraphrase the actuaries' specific forecast: Unless taxes rise or benefits fall, the system will operate at a deficit this year and next, return to a surplus through 2014, then sink back below the surface in 2015 and never come up.
Doesn't the Social Security trust fund cover that? No, silly. All those years of surplus in Social Security were recorded in a book entry dubbed the "trust fund," but the non-marketable special Treasury bonds that make up the fund don't represent any assets that can be cashed in to pay benefits. What the trust fund does is give the system authority to tap the Treasury to pay for benefits, but it doesn't help the Treasury come up with the money.
The fact is, to cover benefits, you and I and Secretary Geithner and his successors have to pony up the old fashioned way-by borrowing, raising taxes, or cutting benefits elsewhere in the federal budget.
Wait a minute. That's no different from what we'd have had to do if there was no trust fund. Bingo. If you'd rather hear it from the horse's mouth, Allan Sloane notes that this passage appeared in the 2009 Trustees' report (though it was curiously missing from the 2010 edition):
Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance [bond] redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.
Are current beneficiaries going to lose out? Really rich ones might pay more income taxes on their benefits, as well as they will on their income. But no politician is suicidal enough to touch current retirees' benefits.
Are workers going to lose out? Something will have to give to keep the system solvent, and it will inevitably be given by those of us still in the workforce. The Administration has been floating the idea of gradually raising the age at which you become entitled to full benefits. A plurality of today's workers will retire at 62, as those before them did, but they would get a lot less than under current law. However, that's not what taxpayers want: The most popular proposed fix for Social Security is to apply payroll taxes to every dollar that high earners earn. (Right now they're taxed-and receive benefits based on-income only up to $106,800.)
Tax rich people? Easy. And that will solve the problem? If you tax the rich enough and cut benefits enough, you can make the system self-supporting on paper. But remember, "self-supporting" in Social Security accounting means drawing on the trust fund. "Drawing on the trust fund" is just code for more borrowing, taxes or benefit cuts elsewhere in the economy. By 2037, Social Security will soak up 10 percent of all income tax receipts-on top of what the system collects in Social Security taxes.
I thought Social Security was the easy entitlement to fix. It is, in the sense that you can easily see what needs to be done to make the numbers add up--as opposed to Medicare, about which no one has a clue what to do.
But the fact is, we don't fix Social Security by making the numbers add up. Social Security is a political construction, not a P&L statement, and its survival in anything like its current form depends on its seeming fair and logical to voters. Today, politicians trip over themselves promising to protect Social Security benefits. But as the boomers qualify for Social Security and Medicare and the oldest fifth of the nation start to suck up more and more of the wealth produced by their kids and grandchildren, that might change. Robert Ball, former chief actuary of Social Security, predicted that one day a President would be elected promising to cut Social Security. Hard to imagine now, but if it happened, economic historians would trace that President's campaign back to 2010, the year that Social Security stopped paying for itself.
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