The Social Security crisis is real

Paul Krugman’s astonishingly incorrect column about Social Security’s finances is based on the premise that anticipated deficits in the Social Security program may never materialize.  A couple of years ago, he could have made that claim with a very slight chance of being correct.  This year, facts have already overtaken his weak argument: the CBO reported earlier this year that Social Security is already spending more in benefits than it collects in taxes, which the program’s own trustees confirmed last week.

The cash-flow deficit matters because the so-called Social Security Trust Fund that has supposedly been accruing value since 1983 has already been raided and spent by Congress on unrelated programs.  In its place are a bunch of IOUs from the general fund of the Treasury.  With the program now running deficits, those IOUs are being redeemed – but because Congress has already spent the money, it has to be replaced with cuts to other spending, new taxes, or more federal borrowing.  In other words, precisely the options that would be available if the trust fund didn’t exist at all.

Social Security’s trustees predict the program will run deficits this year and next year, then return to surplus for three years (if this optimistic prediction comes true, we can expect Congress, as usual, to spend the surpluses on unrelated programs) before tipping into permanent and growing deficits starting in 2015.

The basic problem is demographic.  Social Security was designed as a transfer program: current workers pay for the retirement of current retirees.  That system worked when the number of workers was growing faster than the number of retirees, but that’s no longer the case.

Fifty years ago there were 16 workers for every retiree. This year, for the first time, it dropped below three workers per retiree, and in 10 years the trustees project will drop to 2.5, followed by a drop to 2.1 by 2035.  If Social Security continues to be a transfer payment, it will place an incredible strain on workers in the near future and help derail economic growth.

Higher payroll taxes would kill jobs, slow the economy, and harm the financial markets. Social Security simply cannot be propped up in its present structure without damaging American workers and the economy.

President Obama’s deficit commission will likely recommend some combination of tax hikes, benefit cuts, and increases in the retirement age.  While these moves might alleviate the problem from the perspective of federal government finances, they would do so at the expense of workers.

Social Security has a problem that’s even bigger than its insolvency, which is that it offers a terrible deal for young workers. For young, single workers all Social Security promises (a promise it can’t even afford to keep) is about a 1.5 percent real rate of return. What it can afford to pay is more like half a percent, which is more like passbook interest than a real investment return.  Polls consistently show that strong majorities of younger workers don’t expect to ever collect any Social Security benefits.