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Social Security and the Budget

Publication Date: May 19, 2010
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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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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?

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