Again With Social Security?!

-- Posted by Neil H. Buchanan

In my latest Verdict column, I return to one of my favorite topics, explaining (once again) why Social Security should simply not be on the agenda for "reform" in Washington. "Again with Social Security, Professor Buchanan?!" readers might well ask. Which was exactly my reaction, when I saw recently that the Obama people have been talking again about including Social Security cuts in a so-called Grand Bargain with House Republicans. We are back to this again? Really?!

Admittedly, anything that the President or his spokesmen say about Social Security at this point might be nothing more than an effort to put the Republicans in a bad light, emphasizing once again Obama's preferred pose as the centrist compromiser, a man who could solve oh-so-many of our problems, if only the obstructionist Republicans would come to the table, willing to act like adults and compromise on some of their cherished positions. I thought that Obama had finally given up on that theme, having finally realized that he was getting nowhere with an accommodationist strategy. Even so, he and his (now highly suspect) political team might see some advantage in claiming that his mind remains open to reasonable ideas from people who will consider compromising.

No matter the merits of that particular strategy, however, one must still ask why it is Social Security that Obama has been so willing to throw on the chopping block. It is extremely popular. It is universal. Any financing issues related to it (which continue to be over-hyped) are quite easily fixed, through one or more simple means. Those issues are, moreover, anything but pressing. And people are beginning to understand, more than ever, just how important Social Security has become, in a world where private pensions are disappearing, and private savings have been wiped out by financial market disasters. Despite all of that, Obama (and, to be clear, much of the mainstream policy and media establishment) would have us deal with the "entitlement crisis" by cutting the one entitlement program that is fundamentally healthy. Again with Social Security?! Why?

The primary argument, of course, is that we need a Grand Bargain to head off fiscal disaster. All hands on deck, and all that. The problem with that argument is that forecasts of fiscal disaster are premised on the idea that the government's borrowing needs will, over the next few decades, rise without limit. At some point, this thinking goes, the financial markets will notice that we really have entered into a realm where borrowing will spiral out of control. Only by cutting spending -- and, for those who are not using the issue as a Trojan Horse to simply shrink government, by raising taxes -- can we prevent that from happening.

Social Security, however, simply does not fit into that story, even if one believes the scary warnings about its long-term financial shortfalls. First, if (and this is much more contested than one might imagine) Social Security benefits must be cut across the board when (or if) the Trust Fund is exhausted (last mid-range estimate: 2033), then there would be no Social Security annual shortfall going forward. That is, if the Treasury is paying, say, $400 billion in 2033 from the Trust Fund to make up for Social Security's too-low tax revenues, in 2034 Treasury would not have to pay that $400 billion. The fiscal deficit would automatically go down, with Social Security beneficiaries paying the price (by seeing their benefits reduced by about 25%). Going forward, Social Security would have no effect on the deficit.

Second, as I mention in my column, even a decision not to cut Social Security benefits (should the Trust Fund reach a zero balance) would not cause our borrowing needs to spiral out of control. The Congressional Budget Office's forecasts show that the path of future Social Security tax revenues and scheduled benefit payments both flatten out. Revenues will be less than benefits by approximately 25%, but that situation would continue indefinitely, year by year. Therefore, even if Congress in the fateful year decided simply to honor the law's promised levels of benefits, borrowing to make up the difference, the net effect would be to increase borrowing by a fixed percentage of GDP every year. Deficits would be higher every year, but not rising. Debt would be on a higher path, but not a less sustainable one. Fiscal catastrophe is based on a scenario in which debt is rising without limit as a fraction of GDP. Social Security would not make that happen.

As we have long known, the unsustainable part of the long-term forecasts is medical care. Those costs could rise so quickly, without offsetting revenues, that the federal fiscal situation could spiral out of control. As I have argued many times, however, the problems in that scenario would go far beyond fiscal catastrophe. No economy -- not even one in which the government was uninvolved in providing health insurance -- could survive the cost growth that is assumed in the catastrophic scenarios showing U.S. debt rising without limit.

All of which means that Social Security is back on the agenda for no good reason. We can, as I argue in my column, use Social Security benefit cuts to offset part of the remaining annual deficits going forward; but doing that is simply a policy choice that elevates other spending programs and tax cuts above making good on our promises to future retirees. That is plain old political priority-setting, not a necessary response to a looming fiscal crisis.

We thus have a Democratic President who continues to all but beg his opponents to help him cut Social Security benefits in the future (in the name of not having to cut Social Security benefits in the future). If he is doing this for political advantage, counting on his opponents never giving him the Grand Bargain that he so ostentatiously seeks, he is playing a very dangerous game. Republicans now have good reason to believe that Democrats (and many of their policy analysts) are wobbly on Social Security. This sets the table for dangerous and unnecessary cuts in the future.

If Social Security ultimately dies, it will not be because of unbalanced financial flows. It will be because its supposed defenders used it as bait, and then were surprised when their opponents swallowed the bait whole, and demanded more.