Abstract
In contrast to rising health care and interests costs, Social Security's growing benefits relative to taxes received represent only a modest part of the nation's major fiscal problems. Nonetheless, Social Security serves as the flagship of social welfare policy, and it places increasing demands on the economy as annual benefits grow, life expectancies increase, and the baby boomers retire. Social Security reform, moreover, has far-reaching implications. Done the right way, it can generate higher national output, personal income, and revenues for Social Security and other purposes—helping the nation achieve budget sustainability and a stronger Social Security system.
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Introduction
Almost every investigation of the nation’s longterm
budget tells a similar story: the nation is not
on a sustainable path. But how closely is that
budget story related to Social Security?
Many budget projections start with basic
spending data on Social Security, Medicare, and
Medicaid, interest costs that arise with increased
debt, and everything else—and then calculate
future deficits that arise when that spending is
compared to revenues. Relative to the projected
increases in deficits and spending, the growth in
Social Security costs is moderate. Health care cost
growth, along with rising interest payments on
growing debt, dominate the spending numbers,
while revenues fall far short of what is necessary
to meet projected total spending under current
laws. For instance, Social Security costs are projected
to rise by about 2 percentage points of
America’s gross domestic product (GDP) from
about 2007 to 2030, while health costs rise much
more.
Social Security nonetheless plays an important
role in the nation’s budget crisis. In the first
place, it is the flagship of social welfare policy.
Many of government’s other programs, as well
as private expectations about when to retire,
employer design of pensions, and seniority pay,
revolve around such Social Security features as
when the system says Americans are “old.”
Put another way, within a couple of decades
close to one-third of the adult population will be
on Social Security, retiring on average for about
one-third of their adult lives, if we remain on our
current path. This flagship policy has implica-tions for how the rest of public and private policy
evolves.
Second, Social Security as a system unto itself
is out of balance. One can use the Social Security
actuaries’ trust fund accounting, numbers generated
by the Congressional Budget Office, or
almost any other accounting scheme, and still
reach the same conclusion. Social Security has
certain features that essentially require it to grow
at a rate somewhat faster than the economy—
and faster than the revenues devoted to it. Its
growth in the share of the economy is hardly
new; it has continued on that path for most of its
70 years of existence. Using standards such as
the economic well-being of the old compared to
the young, or the share of spending devoted to
investment in the future, it is always a valid
budget question to ask what share of economic
growth and government revenues—regardless of
overall financial balance—should continue to be
devoted to this program versus others.
Third, an economy must adjust to demographic
change; there is no alternative.
Unfortunately, “Social Security” is often used as
a synonym for this demographic issue, but it is
not. Government, in turn, must adapt to the
effects that lower birth rates and longer lives
have on GDP and employment growth, income
tax revenues, Medicare revenues, state revenues,
Social Security revenues, and total spending on
the elderly as a share of both the economy and
the government budget. The changes will be
reflected partly in Social Security calculations,
but also in such effects as the decline in income
taxes when the adult employment rate falls.
Simple arithmetic, therefore, tells us that
adjustments must be made in work patterns,
saving rates, tax rates, or benefit rates—not just
in Social Security, but in other public and private
programs as a whole. Adjusting to these demographic
issues extends well beyond Social Security,
but, again, Social Security is the flagship.
Interestingly, Social Security reform is not
really an “elderly” issue—at least not for today’s elderly. No one expects any reduction in current
recipients’ Social Security benefits, except possibly
a change in the cost-of-living index that affects
how benefits adjust for inflation. And even small
benefit increases might be possible for some of
them. Paradoxically, other budget reforms are
more likely to affect the elderly than is Social
Security reform.
Social Security reform as a budget issue is
mainly about younger generations, who are
expected to have significantly higher benefits on
average than the current elderly, but whose taxes
are insufficient to support those promised benefits.
Fixing Social Security is essentially an issue
for today’s middle-age and younger people: do
they want to see an increasing portion of government
effort and taxes devoted to them when they
get old, or would they prefer to set priorities for
themselves and their children?
(End of excerpt. The full brief is available in PDF format.)
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