October 21, 2014

Impending Crisis Should Force Action On Social Security in the Next Congress

For several years we’ve heard a familiar tune from the Social Security trustees: Its programs are unsustainable in their current form but insolvency is still years away. This time is different because the next Congress will face a deadline to act.

Social Security pays the benefits of retirees and disabled workers through a combined 12.4 percent payroll tax it collects from wage earners and their employers. Of that, 10.6 percent is obligated to pay Old Age and Survivors Insurance (OASI) benefits and 1.8 percent is obligated for Disability Insurance (DI). Additionally, income taxes collected on these benefits are funneled back into the program.

In years when more money was collected through these taxes than was paid out in benefits, the respective Social Security trust funds were credited with surpluses. When promised benefits exceed tax revenue, Social Security is authorized to continue paying full benefits until those trust fund credits run out. For Disability Insurance, that time will be upon us in 2016 when its trust fund becomes “insolvent.”

According to the trustees, Congressional failure to act by then will lead to an automatic, across-the-board benefit cut of 19 percent for disability insurance beneficiaries. Such a steep cut would impose unconscionable harm on people who depend on the program.

So what is the alternative?

The last time the DI fund faced exhaustion was in 1994. At that time, Congress adopted a recommendation from the trustees to reallocate a portion of the OASI payroll tax to the DI program (increasing DI’s share to 1.8 percent, up from 1.2 percent).

Those who want to avoid the realities of Social Security’s challenges are suggesting that Congress could fall back on this supposedly simple solution again. Unfortunately, circumstances are very different now than they were in 1994.

Back then, OASI had an annual cash-flow surplus of $23 billion (and thus more money available) compared to its $34 billion deficit last year. In a statement accompanying the 2014 trustees report last week, the two public trustees emphasized why it would be unwise to apply a similar fix to the current crisis.

“Of the two funds, OASI faces the larger long-term imbalance between income and obligations,” they wrote. “As baby boomers receiving DI benefits reach Social Security’s full retirement age, the costs of their benefits shift from DI to OASI, increasing costs for the latter trust fund. The DI Trust Fund’s impending reserve depletion signals that the time has arrived for reforms that strengthen the financing outlooks for OASI and DI alike."

Indeed it has.

The public trustees agree that reallocating money from OASI may seem like the “easy” solution, but without other reforms this would simply be robbing Peter to pay Paul. It would do nothing to ensure the long-term sustainability of either program and would make addressing the overall shortfall in Social Security that much more difficult in the future.

At a time when there are already insufficient revenues to pay for promised old age benefits, elected officials should be concerned of the possible political consequences a reallocation could invite. It would not be surprising for some people to allege that this cop-out is “taking money from seniors’ benefits to pay for congressional can-kicking.”

In addition, policymakers in both parties who have been reluctant to provide specific plans to reform and strengthen Social Security should consider the growing economic ramifications of inaction. Allowing Social Security’s deficits to grow unchecked would put a greater burden on general revenues, raising concerns that many other important government programs will be increasingly squeezed out. Responsible reform should protect Social Security programs as well as other national priorities.

Lawmakers could secure Social Security’s future by raising taxes, reducing benefits, or some combination of the two. But every year they delay, the changes necessary grow larger. The opportunity to gradually phase in these changes and give people time to adjust is also diminished.

The trustees note that absent reforms, OASI beneficiaries would face a 25 percent across-the-board benefit cut in 2034 and beyond -- something any serious advocate of Social Security should find unacceptable.

In recent years there has been a sizable community of policy advocates (mostly progressives) who acknowledge Social Security’s unsustainability but insist that any reform should be dealt with independently of a “grand bargain” on the rest of the federal budget. The Disability Insurance deadline gives them an opportunity to put their money where their mouth is by proposing comprehensive solutions on Social Security that can gain bipartisan support in the next Congress.

No one supports 19 percent or 25 percent benefit cuts for those who depend on these crucial safety-net programs, so the path forward is clear. The next Congress must be when all Americans -- Democrats, Republicans, seniors, workers, and policymakers, both inside and outside the beltway -- come together and compromise on a plan to sustainably strengthen these critical programs for future generations.

This blog was also published on The Hill's Congressblog.