The Economic Policy Institute stands by its analysis of Social Security, after being criticized in a recent Washington Post editorial. On its 75th birthday, Social Security is financially sound through 2036. There is no emergency. If no changes are made, beginning around 2037, benefits will be reduced. But modest increases in revenue can close the expected shortfall and preserve full benefits.
A recent editorial in The Washington Post [“Whatever the deniers say, Social Security needs reform soon”], painted the Economic Policy Institute as a Social Security “denialist” with a negative view of President Obama’s National Commission on Fiscal Responsibility and Reform.
EPI certainly does not deny that there are long-term imbalances in the federal budget: passage of the Bush tax cuts and the prosecution of two protracted wars created serious problems even before the Great Recession put 15 million people out of work and dramatically reduced federal revenues. The key spending issues in the long term are rising health care costs and a lack of revenue, not Social Security.
The Post’s suggestion that EPI bears some ill will toward the Fiscal Commission is simply not true. While we do have differences with many of the views expressed by some individual members of the commission, which are highlighted in our recent report, “Social Security and the Federal Deficit,” EPI has never denigrated the commission’s efforts. EPI has provided the commission with background papers, policy memos, and both written and oral testimony. We have even loaned a full-time staff member to the commission at EPI’s expense. To be sure, there are those on both sides of the ideological spectrum who are “preemptively bashing” the commission; however, EPI is committed to working with the commission and others to develop viable solutions. While we reserve the right to differ with the commission’s conclusions and recommendations, we do believe that there is a long-term budget problem that should be addressed.
Nor do we deny that Social Security has a long-term imbalance. But it is emphatically not the cause of the federal government’s long-term deficits, since it is prohibited from borrowing and must pay all benefits out of dedicated tax revenues and savings in its trust funds. The editorial itself concedes that “Social Security is not a cause of the current or future debt.” We wonder, however, why this is then followed by the non sequitur, “but putting it on a sustainable footing is essential to getting the nation’s fiscal house in order.” In that same spirit we wonder why there’s so much focus on “fixing” Social Security in the discussion around the President’s deficit commission since, after all, Social Security is “not a cause of the current or future debt.”
As chief actuary Stephen Goss outlines in the current Social Security Bulletin, Social Security costs are projected to level off after the Baby Boomer retirement at around 6% of GDP. Though this is higher than the current 4.8%, solvency could be restored on a sustainable basis with modest adjustments to the program’s revenues.
Some of these changes are “no-brainers” that should be uncontroversial. Virginia Reno of the National Academy of Social Insurance calculates that two minor changes—raising the taxable earnings cap so it again covers 90% of earnings, and treating all salary reduction plans the same as 401(k)s with respect to payroll taxes—would close half the projected shortfall. The rest could come from a gradual and modest increase in the payroll tax, perhaps rising with life expectancy, though this may not even be necessary if typical workers’ wages keep up with productivity growth. Another option is eliminating (rather than simply raising) the taxable earnings cap on the employer side, in keeping with the Medicare tax. The public, incidentally, strongly supports closing Social Security’s funding gap through higher revenues rather than benefit cuts.
We tend to agree with the Post that it is better to continue funding Social Security through dedicated taxes rather than general revenues, because Social Security’s contributory structure ensures broad support for the system, which is understood to be separate from the rest of the federal budget. One disadvantage of this approach, however, is that payroll taxes tend to be regressive, which is why some of our allies have proposed earmarking estate taxes to help pay for Social Security’s legacy costs.
In truth, our most fundamental disagreement with the Post is its insistence that restoring long-term solvency requires benefit cuts. This is wrong as a matter of mathematics and morality, too. Given that benefits average a meager $14,000 a year, with millions of seniors receiving even less, there is really no room to reduce the typical recipient’s benefits. The typical senior on Social Security relies on the program for more than half of her income, so any substantial cut will cause hardship for millions of people.
It is particularly unfortunate that raising the normal retirement age has become the favored solution in Washington –including at the Post, since, as Goss explains in his Bulletin article, the projected cost shift is driven primarily by lower birth rates rather than rising life expectancy. Furthermore, while higher income workers have made gains in life expectancy, low-income workers have not. Raising the normal retirement age from 67 to 70 is equivalent to a 19% across-the-board benefit cut, so we are puzzled as to why the Post would react with horror at the idea of allowing the trust fund to be exhausted in 2037, which would force a 22% cut in benefits, but does not appear to oppose legislated cuts on a similar scale.
Social Security’s far-off solvency problems should be of far less concern to the Post and to Congress than the alarming rise in inequality in the United States, which affects the standard of living of Americans today. The share of national income going to the top 1% of Americans has been growing sharply and , pre-recession, was at levels unseen since right before the Great Depression. Much of that income growth is in tax-favored dividends and capital gains and other income that escapes Social Security taxes. This rising inequality has many causes, from the suppression of unions to the loss of manufacturing jobs, from our catastrophic trade imbalance to the deregulation of the transportation and financial services industries. But whatever the causes, the existence of such dramatic inequality should provoke attempts to reverse or mitigate it, including by taxing rich, high-income people in new ways and at higher rates. It makes more sense to look to their vast, untaxed income than to the monthly benefit checks of retirees to close the funding gap.
The “when and how” we address the deficit problem really matters, however. How soon we start addressing deficits is vitally connected to the state of the economy, and we believe that no deficit reduction should take place before unemployment is at or below 6.0% for six months. How we address the longer term budget challenge is vitally linked to what type of nation we want and what our priorities are: it is not simply a matter of choosing some spending to cut or some revenues to raise. Retirement and Social Security are a case in point. We need to start by acknowledging that retirement insecurity has risen for two reasons: (1) personal wealth has been severely
diminished as stock and housing wealth plummeted; and (2) the employer-provided pension system has weakened as fewer employees are provided guaranteed benefits. The challenge then is to address Social Security’s shortfall while meaningfully improving retirement security, an approach we wish The Washington Post would take.