The Social Security crisis is real

Phil Kerpen President, American Commitment
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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.

Democrats like Krugman smell a political opportunity and are going to enormous lengths to claim that there is no problem and pursue the politically attractive option of burying their heads in the sand.  An option that will, by law, result in enormous benefit cuts that will hit the same workers they claim to care about.

There is another option.  We must begin investing Social Security dollars in real assets that will earn a real rate of return, instead of paying them out to current retirees and allowing Congress to waste any surplus on unrelated federal programs.  Back in 2005, the chief actuary of Social Security found that at least four separate proposals could achieve full solvency by harnessing the power of higher investment returns, without tax increases of benefit cuts.

There are two ways to do it—allow government to centrally invest Social Security dollars, like a pension, or allow workers to make their own investment decisions via personal accounts.  Democrats are wrong to claim that personal accounts would hand Social Security over to Wall Street because – unlike the central investment option, while Bill Clinton favored – individuals would make their own decisions along with their choice of financial advisers.

The idea would be to take control of retirement away from politicians in Washington and from politically connected Wall Street insiders and put it in the hands of workers themselves.  Even the most risk-averse could choose to invest in government bonds and earn a higher return that Social Security currently promises.

One key question is how to pay for benefits of current retirees if the taxes from current workers aren’t shipped immediately out the door.  That is a real problem, which already exists because the same dollars can’t be spent twice, and the money we’re spending on benefits now won’t be there when current workers retire.  The best solution is to cut other, unrelated wasteful spending to shore up benefits while transitioning younger workers into a sustainable, reformed system.  We can start by repealing the hundreds of billions of dollars of unspent stimulus.

Whether you agree with my preferred reform or not, the simple fact is that Social Security is already in deficit and can’t afford to keep its promises.  That means the status quo is not an option.

Mr. Kerpen is vice president for policy at Americans for Prosperity.