Something very important was missed in the news cycle of celebrity inspired pardons and trade wars. The trustees who oversee Social Security issued their latest report on the financial health of Medicare and Social Security, and it is not good. According to the trustees, Social Security’s “trust funds” will be depleted in 2034. Medicare’s hospital fund runs out in just eight years. Even worse, Social Security will be forced to “dip into its trust fund” to pay benefits this year.
In the long-term, the fiscal outlook for Social Security is grim. The program will run a $19 trillion deficit over the next 30 years. It will also contribute to skyrocketing interest on the national debt.
You might think that since Republicans control both Congress and the White House they will address this issue. You would be wrong. For starters, President Donald Trump promised that he would not cut either Medicare or Social Security.
"I am going to save Social Security without any cuts. I know where to get the money from. Nobody else does." – my @SRQRepublicans speech
— Donald J. Trump (@realDonaldTrump) May 22, 2015
He has kept his promise for the most part. As for Congressional Republicans, many of them would like to address entitlements, but they feel they can’t. The last time outgoing House Speaker Paul Ryan addressed them, he was “thanked” with ads portraying him as pushing grandma off a cliff.
There is also political reality standing in the way for Republicans. The fact is the Republican Party is the party of old people. Older white voters are the Republican Party’s most reliable voting block. They would likely feel the impact of any cuts to entitlements. Politicians of any party, if they want to keep their jobs, will not do anything to harm their voters.
You might think the Democratic Party, which is the party of younger people, would seize the mantle of entitlement. Well, you would be wrong. Most Democratic proposals dealing with entitlements call for expanding them. There are even proposals to raid private retirement plans such as 401(k)s to fund an expanded Social Security.
In fact, many on the left deny there is even a problem.
"Insolvent" misleads and scares people into thinking benefits will be gone.
In fact, Social Security will still be able to pay 79% of benefits even if Congress does nothing.
We should require the wealthy to pay their fair share so we can protect + expand benefits. https://t.co/u6eHYYPvOO
— SocialSecurityWorks (@SSWorks) June 5, 2018
The political class has decided to kick the can down the road and postpone the day of reckoning. It will only make it more costly to fix the problem when it must be fixed. The time to act is now while the cost is relatively low.
If I could wave a magic wand, I would not have created Social Security in the first place. It is not just because I’m a classical liberal who fundamentally believes taxation is theft, but because Social Security is fundamentally a terrible program.
It is predicated on taking money from working people and giving it to non-working people. It’s a great program for those receiving benefits in the beginning, but eventually as there are fewer and fewer working people to support the program the money runs out. If I created an investment based on Social Security, I would be sent to prison for running a Ponzi scheme. But there is little if any support for ending Social Security.
Since Social Security is not going anyway, we have to be honest about the program. It was sold not as a welfare program, but as a social insurance program people paid into. That is simply not true. There is no Social Security Trust Fund. Instead, there are simply a bunch of IOUs from the Treasury. It transfers wealth from working people to the retired and/or disabled.
Nor are Social Security benefits guaranteed. Congress has cut benefits in the past and can cut them again. In fact, by law Social Security benefits will be cut by around a quarter if nothing is done to shore up the program.
What can we do to save the program? First, we have to rule out some politically popular solutions seen as “easy.” The “easiest” idea is to simply raise or eliminate the payroll tax cap. The first problem is that it won’t cover all of the program’s shortfalls. Secondly, this would push the effective top marginal tax rate close to 50 percent before factoring in state income taxes. Such high taxation would have a negative effect on the American economy.
Another “easy” way to fund Social Security is to cut defense spending down to European levels. The problem is that it would not close the shortfall. It also would place America’s national security and that of the entire free world at risk. Finally, it would invite aggression from America’s enemies such as China and Russia.
A big “easy” solution that is discussed is raising taxes on the rich. But even doubling the top two tax brackets to 70 percent and 74 percent would not close the gap.
As for other “easy” ideas to save Social Security and Medicare by taxing the rich, here’s a chart tweeted out by the Manhattan Institute’s Brian Riedl that proves it just won’t work.
Much of the Twitter-sphere is asserting that we can "easily" pay for Social Security and Medicare by taxing the rich and cutting defense.
Here are the CBO-scored savings of these "easy" reforms.
Have at it. pic.twitter.com/hzhEpzOgKn
— Brian Riedl (@Brian_Riedl) June 8, 2018
There is also a moral component here. It is unfair to ask younger workers to pay crippling taxes in order to fund the generous retirement of Baby Boomers.
The last opportunity to avoid cutting benefits was when President George W. Bush proposed partial privatization of Social Security in 2005. But at the time, the program was going to be paid for with Social Security surpluses. Those surpluses are now gone and in any event, the proposal proved politically unpopular.
There will have to be Social Security benefit cuts in order to avoid either massive budget cuts in everything else and/or economically devastating tax increases. The longer we put those benefit cuts off, the deeper they will have to be.
One idea to cut benefits is to means test them for wealthier retirees. But the Committee for a Responsible Federal Budget found that means testing would only eliminate one-fifth of the budget shortfall. But it would be a relatively easy fix, especially if the means testing is done through higher taxes on benefits.
Another idea is to raise the retirement age. People are living longer and it makes sense to gradually increase the retirement in order reduce payouts from Social Security. But it also makes sense to make the retirement age flexible for those who work in manual labor.
The reality is politicians made promises that cannot be kept. The sooner we bite the bullet and make the necessary fixes, the better off Social Security and younger Americans will be.