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The news about Social Security finances just keeps getting worse.
On Wednesday, June 30, the Congressional Budget Office (CBO) updated its long-term budget outlook. Contained within it were updated projections for America’s largest domestic program, Social Security. The updates are not pretty.
CBO makes two sets of long-term projections. Its “extended baseline” projection literally models current law, meaning that it assumes no legislative action going forward – however implausible this may be. Under the “extended baseline” scenario, current tax rates would expire (meaning rates would rise), the Alternative Minimum Tax would gradually capture millions of additional taxpayers, and overall federal taxes would swell far beyond previous historic highs.
Looking only at this implausible “extended baseline” revenue projection, however, severely understates the fiscal problem facing us. So, CBO produces another outlook called the “alternative fiscal scenario,” which projects forward the continuation of current policies. Most of these policies are embraced by key decision-makers in both of the two major political parties. The “alternative scenario” thus provides the more accurate picture of how events are unfolding.
Under this “most likely” scenario, Social Security’s actuarial deficit is now projected to be 2.1% of covered workers’ taxable wages over the next 75 years, with program insolvency reached in 2037. If that sounds like a minor problem to you, here are several reasons why it’s actually a big one:
First, this estimate ignores the substantial costs of redeeming debt held by the Social Security Trust Fund. The total amount of this debt now tops $2.5 trillion, all of which would be paid off in full by 2037 – a further cost burden atop of the current 12.4% payroll tax. Social Security experts love to argue about the economic meaning of the program’s Trust Fund, but the salient facts are not in dispute. All sides recognize that the Trust Fund consists of Treasury bonds, which are redeemable only with revenues provided by US taxpayers.
Second, CBO’s estimates are relatively optimistic. CBO projects that real earnings will grow by 1.3% annually over the long term. For the past 40 years, real wage growth has averaged roughly 0.8%. The Social Security Trustees themselves project that this growth will accelerate slightly going forward, to 1.1% per year. CBO, in its last few reports, had been more aggressive in projecting future real wage growth at 1.4% annually. They have now retreated slightly from this, but are still on the aggressive side of the Trustees, and thus possibly overstating future revenues.
Third, CBO’s projections keep looking worse and worse. This year’s CBO estimate of the 75-year actuarial imbalance is 36% higher than last year’s projection. This year’s projection for the insolvency date is eight years earlier than last year’s, which means that with over just one year, fully one-quarter of CBO’s projected period of Social Security solvency has disappeared (moving from 36 years distant to 27 years).
Fourth, CBO’s most realistic projection of the Social Security deficit is now larger than the Social Security Trustees’ of last year. This is significant because CBO has consistently been on the optimistic side of the Trustees both methodologically and with respect to several critical assumptions. It suggests that there could be more bad news coming with the next Trustees’ report later this summer.
Fifth, CBO’s rosy Social Security projections of 2008 should never have been believed. When in 2008, CBO projected program solvency through 2049, too many were quick to invoke CBO to argue that Social Security faced no problems any time soon. But anyone who cared to look at the numbers could see even then that CBO’s “extended baseline” projection was unrealistic, as it was based on income tax policy (and real wage growth) projections that were very unlikely to pan out. That CBO has since been forced to move closer to the Trustees’ estimates should not have surprised any of the experts.
Sixth, don’t be fooled by the insolvency date; action to fix Social Security needs to be taken soon. In 2037, it is often said that in 2037 beneficiaries stand to be hit with a 24% cut in benefits. This, however, means not only new beneficiaries, but those previously collecting (some of whom are doing so today). How soon must we act to avoid benefit cuts for people already on the rolls, as well as real declines in benefit levels and damaging tax increases? The answer: within just the next few years.
Incredibly, even as Social Security’s problems grow worse, some of the program’s so-called “defenders” argue not for action to sustain the finances of this important program, nor acknowledge their past errors in projecting robust program health. Instead, they attack (and in some cases, ridicule) those who are willing to solve the problem. In one recent instance, a self-described Social Security “activist” accosted co-chairman Al Simpson of the President’s Fiscal Responsibility Commission outside of a commission working group meeting.
The videotaped exchange was posted on a number of internet sites, with various commentators accusing Simpson of everything from assuming that “Treasury will default on the bonds issued to the Social Security trust fund” (he neither stated nor implied any such thing), to advocating “rolling back the New Deal” (another baseless allegation), “extremism”, and a tendency to “distort and mislead.”
In fact, most of the factual errors contained in the interview were not committed by Simpson, but by the interviewer. That interviewer wrongly asserted, among other things, that the “surplus will go out” in 2037 (Social Security’s annual cash surpluses have already vanished; it is the Trust Fund that is projected to be depleted in 2037); that the program “brings in” $180 billion every year (Social Security is no longer itself bringing in an annual surplus; the treasury is making cash payments of interest owed, but this is a debt financed from general revenues, not money that Social Security is currently “bringing in”); that “they (in the 1983 reforms) actually started prefunding the retirement of the baby boom by building up that huge surplus” (demonstrably untrue), that Social Security is “totally in the green,” “bringing in more money than goes out,” that participants “own” their benefits (not only untrue, but particularly ironic coming from those who oppose establishing personal ownership within the Social Security system) – and countless other errors of fact.
The game of attacking those who wrestle with the realities of Social Security finances may be amusing to some and irresistible political opportunism to others. Unfortunately, it’s a game that dearly costs those who participate in Social Security, and younger Americans in particular.
More serious individuals are studying the fiscal and distributional implications of various options to sustain the program. The day after issuing its updated outlook, CBO followed up with a report on options to repair program finances. This report, unfortunately, understates the problem by relying on the “extended baseline” projections rather than the more realistic fiscal scenario. But it is nevertheless worth reading because it shows effects upon benefits and taxes of individuals born at different times, and with different income histories – both of current law as well as under selected reform options.
The CBO report shows clearly that even under current law, younger generations will experience net benefit losses through the Social Security program. If we continue to postpone action and thereby exempt ourselves from contributing to the solution, we will make their treatment still worse. No amount of ambush interviews can change that reality.
The good people of “Social Security Works” may claim to be targeting Al Simpson, but it’s the younger generations of Americans who will pay the price for the continued irresponsibility that they and too many others advocate. The latest CBO report is just further evidence that it’s time for adults on both side of the aisle to join together, rise above the demagogues, and correct the problem before it becomes insoluble.