A Touchable ‘Third Rail’

Published Jul 6, 2010. By Clea Benson.

Even though they held it in a formal, gold-leafed room at Union Station, organizers of a deficit-reduction forum last month called the discussion “Back in Black.” And when House Majority Leader memcodes(summary)memberreports&print=true&sortSpec=displaydate+desc','membercard',680,430);">Steny H. Hoyer took the stage to give the keynote speech, he gave the policy-wonk crowd a jolt fitting for the AC/DC song.

“Unfortunately, we can blame our long-term deficit on policies that are almost universally popular,” the Maryland Democrat told his audience, a group assembled by the moderate Democratic think tank Third Way. He went on to suggest a solution that up to now has been anathema to any American politician with constituents approaching age 65: making changes to Social Security.

Hoyer proposed bringing the program’s expenditures in line with its revenue by raising the retirement age and restructuring its benefits and taxes. Beyond ensuring the system’s solvency, his goal would be to reinforce its progressive nature by focusing assistance on those with less income and raising the burden on those who are well-off.

His comments that day made headlines heralding the abrupt return of the 75-year-old social insurance program for retirees to the policy agenda. Social Security has been living on borrowed time since Congress bailed it out of a financial hole in 1983. While it was unusual for a top Democrat to endorse broad changes to Social Security, Hoyer’s suggestions for strengthening the system weren’t radical. In fact, it’s always been the case that modifications like the ones he was proposing would preserve the basic structure of the program and keep it solvent for years to come.

What has changed is that the political environment makes it possible to discuss them in the open. Americans are increasingly fearful that the $13 trillion federal debt cannot be sustained. International pressure to restore balance to the nation’s fiscal position is growing. And the fact that Social Security is suddenly incapable of covering its costs with the taxes that are paid in has brought the consequences of deferring action into sharp focus. With Democrats — including the president — willing to take the lead, those who advocate relatively minor changes to Social Security say now may be the time to place the program and the government on better financial footing.

“Of all the things we need to do that have significance for the future, addressing Social Security, making it solvent and sound for as far out as the eye can see, is probably the easiest,” South Carolina Democrat memcodes(summary)memberreports&print=true&sortSpec=displaydate+desc','membercard',680,430);">John M. Spratt Jr., chairman of the House Budget Committee, said on C-SPAN two weeks ago. “Not easy, but compared to Medicare, it’s an easier chore to make Social Security solvent for the long run.”

As the world struggles to recover from the worst economic collapse since the 1930s, fiscal solvency has become a global issue. President Obama and the leaders of other industrialized countries pledged last week to cut their budget deficits in half by 2013 and to halt the growth in governmental debt by 2016. Obama made it clear that he considers the big entitlement programs critical to this plan.

“Even if we had not gone through this financial crisis, we’d still have to be dealing with these long-term deficit problems,” he said at the Group of 20 summit in Toronto on June 27. “They have to do with Medicaid; they have to do with Medicare; they have to do with Social Security. They have to do with a series of structural problems that are not unique to America.”

Concern about borrowing has brought Social Security back to the forefront sooner than expected, said David C. John, an expert on the issue at the conservative Heritage Foundation. “The focus internationally on government debt gives that little bit of extra push also because we can see other governments that have made genuine progress in starting to cut back their spending,” he said.

With a record deficit of $1.6 trillion projected for this fiscal year — equal to more than a tenth of the overall economic output of the country — U.S. lawmakers are mired in squabbles over whether and how to pay for relatively small programs, including additional dollars to boost the still-weak economy. But economists and experts have long said reining in such expenditures amounts to nibbling around the edges of the problem.

Interest payments on the debt and spending on large entitlement programs mandated by law — principally Social Security, Medicare and Medicaid — will contribute the vast majority of the growth in the federal debt in the long run. The latest long-range forecast from the Congressional Budget Office, released last week, predicts that those programs combined will grow to as much as 26 percent of gross domestic product by 2035, up from less than 12 percent today. And the debt will triple in size as a share of the economy. Meanwhile, other spending will actually decline as a percentage of GDP.

Lawmakers are unlikely to muster the energy anytime soon to reopen a debate on Medicare and Medicaid, having just passed the contentious health care overhaul. And figuring out what to do to constrain health care costs is largely a matter of trial and error. But with Social Security, the options are relatively limited and clear cut.

In the coming decades, the growth in the number of retirees drawing checks will far outpace that of workers paying into the system. If benefits and taxes remain at current levels, a deep shortfall in financing is inevitable.

Obama appointed a bipartisan fiscal policy commission in February and charged its members with developing a plan by the end of this year to reverse the growth in government debt. Changes to Social Security are widely expected to be among the panel’s recommendations. It won’t be the first time in recent history that presidents have tried to tackle the issue: George W. Bush and Bill Clinton both tried and failed. But they were operating in a different political environment.

“A lot of factors come together that make it more plausible that you could get reform now than in the past,” said Robert Bixby, executive director of the Concord Coalition, a group that publicizes the dangers of the government’s rising debt. “Before, people looked at Social Security reform in an isolated sense and not as part of larger fiscal plan for the nation, and I think that has tended to politicize the debate so that people say, ‘Why are you picking on Social Security?’ And some of the positions have been very ideological and partisan.”

It is true that as the subject of overhauling Social Security gets more attention, the emotion and rhetoric are getting hotter.

Democrats and Republicans last week exchanged barbs after House Republican Leader memcodes(summary)memberreports&print=true&sortSpec=displaydate+desc','membercard',680,430);">John A. Boehner of Ohio suggested raising the retirement age to 70. Meanwhile, liberal groups are suspicious that Obama’s fiscal commission will come up with a plan to slash benefits for people who depend on it as their principal source of income. They are waging a public campaign to get the panel to leave Social Security alone.

But those advocating the fine-tuning approach say it could prove acceptable to both the left and right without turning the program upside down.

Social Security has “always been a charged issue, the third rail of American politics,” Bixby said. “People are now talking about it as the low-hanging fruit.”

Increased Urgency

Whether they are able to change the terms of the debate remains to be seen. With health care, for example, many lawmakers saw an alignment of interests in overhauling the system, and Democrats even borrowed some ideas from Republicans to build support. But in the end the politics of the issue were so ugly that Democrats had to force through a bill without Republican votes.

Health care may offer a lesson in terms of leadership as well. The president allowed Congress to take the lead, and ended up having to take what he could get. In the case of Social Security, “the lead is going to have to come from the administration,” Bixby said. “It’s not that Congress is unaware of the problem or disagrees with some of the suggested solutions. It’s just that they are so frightened of the issue.”

Obama’s fiscal commission, which is expected to make a series of recommendations in December, could be the catalyst for legislation.

The issue has also become much more urgent in just the past few months. Until recently, the program had been consistently taking in more revenue than it spent. That is no longer the case.

Because of the recession, the number of workers paying into the system has declined. Rising unemployment also led many Americans to start drawing retirement benefits earlier than they would have otherwise. So far in fiscal 2010, the Social Security Administration has taken in almost $39 billion less in tax revenue than it spent on benefits and administrative costs, Treasury Department figures show.

That was an unexpected development. In their most recent report a little over a year ago, the Social Security trustees predicted that the program’s tax receipts would continue to exceed costs until 2016, when it would need to start tapping trust fund balances. From that point forward the shortfall was projected to grow at an accelerating pace, drawing down the trust funds, which now stand at $2.5 trillion from past surplus tax payments and interest paid by the Treasury. The funds were expected to run out in 2037.

The trustees aren’t expected to issue their report for the current year until later this summer — mostly to allow more time to evaluate the effects of the just-enacted health care overhaul. But judging from other estimates, they are certain to move forward the dates by which Social Security will start running out of money, and possibly the date by which the system is effectively bankrupt.

For instance, last week CBO pointedly noted that it has raised its expectations for the shortfall between receipts and benefit costs. Although CBO has a somewhat more optimistic long-range forecast than that of the Social Security trustees, it projects the same general trend line, and its shortfall estimate is now greater than the one the trustees produced last year.

Social Security’s problem is demographic. Workers finance the program with a 6.2 percent tax on their wages, up to a maximum of $106,800, that is matched by their employers. The revenue paid in by current workers is used to cover benefits for current retirees. But with increased longevity, stagnant birth rates and a growing number of baby boom retirees, the ratio of workers to retirees, which was as high as 16 to 1 in 1950, is expected to fall to about 2 to 1 by 2035 — and tax receipts from those workers won’t come close to covering benefits. Many experts from both ends of the political spectrum see such math as a clear argument for immediate action.

“Obviously, it is important to move now,” said Douglas Holtz-Eakin at a recent conference on Social Security. Holtz-Eakin, a former CBO director who served as an economic adviser to both Bush and memcodes(summary)memberreports&print=true&sortSpec=displaydate+desc','membercard',680,430);">John McCain, the 2008 Republican presidential nominee, suggested that making sure that Social Security receipts and expenditures are aligned will protect the program from cuts as other entitlement spending continues to grow.

“Insulating Social Security as much as possible from those budgetary pressures, I think, is increasingly desirable,” he said.

Richard W. Johnson, who directs the retirement policy program at the Urban Institute, said fixing the projected shortfall far in advance will also help American workers anticipate their future needs.

“The really good reason to act as soon as possible is that people need to plan for retirement for decades,” he said. “We can’t just spring a change on people when the trust fund runs out of money. What works best is if we have a plan and announce a change that doesn’t take effect for 10 or 20 years.”

While it appears that mainstream Democrats such as Hoyer are increasingly open to talking about Social Security now, there is some pressure from the political left to wait. Dean Baker of the Center for Economic and Policy Research and other liberal economists say they are concerned that the current political atmosphere, where fiscal fears are trumping all, will push lawmakers to enact Draconian cuts in benefits.

“I worry, given an environment in which people have been led to believe the program’s going to collapse tomorrow, we will see many more benefit cuts than would be appropriate,” said Baker, speaking at the same conference as Holtz-Eakin.

Replay of the 1980s

In many ways, the situation today looks a lot like it did in the early 1980s, the last time all sides were able to work beyond their differences to shore up Social Security. Lawmakers then were concerned about mounting budget deficits in the aftermath of a recession. The Social Security system was troubled by a short-term cash flow problem driven by a decline in revenues resulting from high unemployment and rising benefits pushed higher by inflation. A major financing crisis was predicted for the turn of the century, when baby boomers would start to retire.

Political lines, too, were drawn in much the same place as today. President Ronald Reagan set off a firestorm in 1981 when he first proposed slashing benefits to make the program solvent. Forced to accept that the idea was a non-starter in a Democratic- controlled House, Reagan agreed to establish a commission to recommend solutions that would be somewhat insulated from politics and might gain bipartisan support. He appointed Alan Greenspan, then an economist in private practice, as chairman.

At the beginning of 1983, the Greenspan commission came up with a plan that included raising the retirement age from 65 to 67 by the year 2027, allowing the taxation of benefits paid to upper-income retirees and increasing the payroll tax, among other things. Congress approved the commission’s recommendations in early 1983.

The basic tools available today for making Social Security more fiscally sustainable are the same as they were then: increasing payroll taxes, raising the retirement age or trimming benefits. The major problem is which to choose, and each option has its detractors.

“This has never been a deep or problematic analytic problem,” said Holtz-Eakin. “This is a political problem.”

Liberal groups see discussions of benefit reductions as a thinly veiled attempt by people who oppose big government to undermine the program entirely. “There’s been a real concerted effort by many people who are not friendly to Social Security to scare people about the program’s future,” said Baker.

Opponents of benefit cuts also point out that the program as structured currently lifts almost 40 percent of elderly people out of poverty and provides a majority of income for even middle-income seniors.

Most of those against raising the payroll tax oppose increases in the overall tax burden on individuals.

Raising the retirement age also poses problems. While lifespans are increasing, a certain segment of the population simply can’t work longer. Advocates caution that such shifts could disproportionately burden people with disabilities or those who spent their lives performing hard labor. (Raising the retirement age, p. 1616)

Despite the fears of those at either end of the political spectrum, solutions to the Social Security shortfall don’t have to hew to extremes, and there is growing optimism that a combination of gradual changes over a long time might prove palatable to lawmakers and the public.

Some in Congress are starting to take a look at the menu of options for taking this kind of incremental, varied approach. In May, the Senate Committee on Aging released a vast document outlining many solutions, ranging from changes in benefit calculation formulas to five different options for modifying the cap on taxable earnings.

“By implementing one or more of these modest changes, we can ensure solvency and even strengthen benefits for those who count on their monthly check the most,” said Sen. memcodes(summary)memberreports&print=true&sortSpec=displaydate+desc','membercard',680,430);">Herb Kohl, the Wisconsin Democrat who chairs the committee, when he released the report.

Last week, CBO released a similar report of its own.

Even some groups that have taken a dim view of Obama’s fiscal commission say they are open to changes. AARP, a commission critic and among Social Security’s staunchest defenders, would be open to such gradual fixes as long as they protected beneficiaries, said John Rother, the organization’s director of public policy.

“When we ask the American people what they would like to do, we find majority support for things like a slight increase in the payroll tax or a slight reduction in benefits for upper income, or measures to promote longer work life,” Rother said. “The public is ready for this. There’s not a real opposition to things that are built on the current system but are tweaks, and if the public’s ready for it, then maybe the political system should be ready for it, too.”

In a March Bloomberg News survey, for example, 78 percent of respondents said they think lawmakers should consider removing the cap on income subject to Social Security taxes, while 52 percent were open to smaller annual cost-of-living increases in benefits.

Experts on both the left and right agree that the best approach would solve the Social Security shortfall with changes to both benefits and taxes.

Robert Greenstein, director of the liberal-leaning Center on Budget and Policy Priorities, a think tank that advocates for lower-income Americans, said he favors a balanced approach, such as one outlined a few years ago by Peter R. Orszag, currently Obama’s budget director, and Peter Diamond, an economist at the Massachusetts Institute of Technology.

The Orszag-Diamond plan would, among other things, raise taxes gradually for some workers and cut benefits slightly for average- income workers. It would also make up for growing gaps in income and longevity between the rich and poor by raising the cap on income subject to Social Security levies and cutting benefits more for the highest earners. It would also increase benefits for the neediest, including some who receive Social Security payments because they are disabled.

The Orszag-Diamond plan “entirely maintains Social Security as a vital social insurance organ, strengthens its safety net functions and restores long-term solvency at the same time,” Greenstein said.

John at the Heritage Foundation recommends an increase in the retirement age. And, like Greenstein, he says lawmakers should scale back some benefits for some higher-income beneficiaries and increase benefits for those for whom Social Security income amounts to less than minimum wage. He also says Social Security policy should be considered in the context of broader retirement savings measures.

“We tend to treat Social Security as though it were the sole retirement income source for most Americans, and realistically speaking, we need to look at the whole issue of retirement security,” John said.

Experts also say some adjustments to taxes and benefits may be necessary to preserve the current progressive nature of Social Security, in which those with lower lifetime incomes tend to get a higher ratio of benefits to taxes than those who are better off. But it’s also important, they say, not to shift too much of the payment burden onto upper- income taxpayers. Social Security’s wide popularity is rooted in the fact that all who pay in are eligible for a check when they retire.

“One of the challenges reformers face is that Social Security redistributes income a little bit, but you don’t want to do too much of that,” Johnson said. “You don’t want to have Social Security become a welfare program, because then people would no longer support it.”

On the other hand, people do want to preserve the program as a social benefit, a fact that became clear the last time Social Security moved to the top of the policy agenda.

In the middle of the past decade, Bush proposed diverting some tax receipts away from the trust funds and into private investment accounts that individuals could control themselves. That idea, which came to be derided as privatization, with its associated financial risks, was never accepted by a majority of the public. Although Bush pressed the proposal in his State of the Union speech in January 2005, it ended up going nowhere.