July 23, 2021 - 9:01 pm
Before D.C. Democrats think about passing trillions in new spending, they should focus on shoring up the Social Security Trust Fund.
This month, the Congressional Budget Office released detailed numbers on its long-term projections for Social Security. It’s sobering — at least for those who are paying attention. The trust fund will run out in 2032. The Disability Insurance Trust Fund will last until 2035.
Social Security’s financial problems are often dismissed as a problem for the far-off future. It’s time to stop procrastinating.
Social Security is actually a generational wealth transfer program. Recipients don’t get their own money back, they receive the contributions of current workers. The trust fund is a form of fiscal fiction. In theory, excess Social Security taxes go into the proverbial “lockbox” to pay for future bills. In reality, the federal government takes that money and replaces it with IOUs.
If the federal government were otherwise in a strong fiscal position, this might not be as worrisome. But in February, the CBO projected that Washington will run a $2.3 trillion deficit this year. The CBO also projects that this year the federal debt will exceed U.S. gross domestic product.
Absent changes, Social Security will add substantially to the size of the debt over the next few decades.
“Over the next 75 years, if current laws remained in place, the program’s actuarial deficit would equal 1.7 percent of GDP, or 4.9 percent of taxable payroll,” the CBO states.
Raising the Social Security tax ceiling on income is one proposal, but that would further erode the relationship between individual contributions and benefits, potentially impacting political support for the program among wealthier Americans. Benefit cuts could also be an option, but that won’t be popular among younger workers. Besides, any move in that direction should shield current recipients and those near retirement age so as not to disrupt their financial planning.
The CBO projects a 30 percent reduction in benefits to future beneficiaries would require a 36 percent reduction in benefits.
Waiting longer makes things worse. In 2032, a 33 percent reduction would be required for all participants or a 45 percent reduction for future participants only.
As entitlement spending takes up a larger proportion of the federal budget, one might expect politicians in Washington to be wary of greenlighting trillions in new outlays. But one would be wrong. Democrats seem determined to push through a $3.5 trillion spending package that could explode inflation and the debt.
As George W. Bush learned the hard way, Social Security’s popularity makes reform difficult. But these numbers show changes are necessary — and the sooner the better.