04/09/2008 03:54 pm ET Updated May 25, 2011

It's Also the Tax Cuts, Stupid

It's time for a reality check in the debate over putting the government's long-term finances back in order.

Last week the trustees who oversee Social Security issued their annual report, showing that the program faces a funding shortfall over the next 75 years totaling 0.56 percent of Gross Domestic Product.

That's slightly less than the 0.6 percent of GDP it would cost to extend the 2001 and 2003 tax cuts just for the highest-income 1 percent of households, a group that currently makes more than $450,000 per year. (The 2001 and 2003 tax-cut laws are scheduled to expire by the end of 2010, but President Bush and most Republicans -- including Senator McCain, the presumptive GOP presidential nominee -- want to make them permanent.)

That doesn't mean we can protect Social Security over the long term simply by letting the tax cuts for the top 1 percent of households expire. The long-term budget problems we face are so severe that any savings from the letting the tax cuts expire (or offsetting the costs of extending them) would need to be devoted to the task of keeping the deficit from rising to levels that would seriously damage the economy.

Nor does it mean that Social Security doesn't face significant long-term challenges. In the near term, the program is in excellent shape; the trustees say it will be able to pay 100 percent of promised benefits for more than three decades. Starting in 2041, however, it will be able to pay only 78 percent of promised benefits. Policymakers will need to make tough choices -- about the revenues Social Security collects and the benefits it distributes -- to make the program solvent over the long term.

Comparing Social Security's shortfall with the cost of the tax cuts does, however, highlight a major problem with discussions about our nation's long-term fiscal future. Too often, such discussions assume that Social Security faces a titanic shortfall that will require radical restructuring of the program, while paying too little attention to the enormous fiscal damage that would come from extending the tax cuts without paying for them.

Extending all of the tax cuts -- not just those for the top 1 percent of households -- would cost more than three times the Social Security shortfall, if policymakers do not offset their costs through other tax increases or cuts in programs.

Over the next few years, policymakers will consider the fate of the tax cuts and of Social Security. For the nation's sake, they should neither understate the costs of the former nor overstate the problems of the latter.

Robert Greenstein is executive director of the Center on Budget and Policy Priorities.