The 12-member congressional committee charged with trimming the federal budget over the next 10 years has a new advocate for putting entitlement programs on the chopping block: President Barack Obama.
Obama, on a Midwest bus tour this week, said Democrats have to be “flexible” when it comes to spending on Social Security and Medicare.
But if the committee did want to take on Social Security, what would need to happen?
Craig Jennings, a federal fiscal policy director at OMB Watch, a nonprofit that monitors federal spending, said there are two ways to close the gap between Social Security’s expenditures and its revenues: increase the payroll tax or lower current benefits.
How do you cut benefits? Raising the retirement age is one way, Jennings said. Changing the way inflation is measured for automatic annual Social Security cost-of-living adjustments is another. Both methods would allow Congress to preserve much of the existing program.
David John, a senior research fellow at the Heritage Foundation, a conservative think tank, said he could see the committee agreeing to both of those changes. (RELATED: Gingrich: Scrap super committee and extend payroll tax holiday)
“I don’t anticipate that the super committee is going to do a wholesale change in the program,” John said. “I expect … if anything, small changes around the edges.”
The Congressional Budget Office projects that in fiscal year 2011, Social Security’s outlays will total $733 billion, or one-fifth of the federal budget.
But Jennings argued that at this point cutting Social Security makes no sense from a deficit-reduction standpoint.
“Social Security doesn’t have an impact on the broader budget deficit, certainly not in the near term,” Jennings added.
Calling the talking about cutting Social Security to balance the budget in Washington “the wrong conversation,” the powerful nonprofit senior advocacy group AARP shared Jennings’s view. (RELATED: Democrat wastes no time taking advantage of his super committee appointment)
“Social Security is self-financed by payroll tax contributions, which are separate from the rest of the budget, and has not created the current fiscal mess,” the group said in a statement. “It shouldn’t be used to fix a deficit it didn’t cause.”
On one hand, AARP is right. Social Security was running in cash surpluses up until last year, John said, so it is true that the program did not cause federal deficits.
On the other hand, though, filling the gap between Social Security’s expenditures and revenues in coming years will make current spending problems worse, since paying full benefits from this point forward will require additional uses of other types of tax dollars, John cautioned.
Republicans have said they are open to changes in entitlement programs. Democratic leaders in Congress, however, do not share that view. They say they worked hard to protect Medicare, Medicaid and Social Security in the debt ceiling deal.
Social Security expenditures exceeded the program’s revenues in 2010, excluding interest credited to the trust funds, for the first time since 1983, according to a Congressional Budget Office report released this month. The CBO also projects the gap will continue: Over the next five years, expenditures will be about five percent greater than revenues.
The real impact of Social Security reforms will come later, said Douglas Holtz-Eakin, president of the Washington-based American Action Forum and former director of the CBO during George W. Bush’s presidency.
“The uncertainty of the future system is bad for younger workers,” Holtz-Eakin said. “They need to know what their likely retirement will be so they can make saving decisions.”
A reform of Social Security would also be the right signal to send to the capital markets to show that the U.S. can change an important and politically charged entitlement program, he stressed.
“If we did so with the Social Security program, we would send a signal of ‘Yes, we can do this, and the capital markets don’t have to worry about the federal budget,’” Holtz-Eakin added.
But disagreements between Democrats and Republicans about spending cuts and revenue increases may be a recipe for gridlock when the committee tries to reach a deal on Social Security reform, said Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities in Washington. Bernstein is a former economic adviser to Vice President Joe Biden.
“The most likely outcome at this time probably is: We end up with the automatic cuts, because you have Democrats who have said ‘we’re not really going to give much wiggle room on entitlement, or really any, unless Republicans get some revenues in the deal,’” Bernstein said. “And Republicans have said they won’t go there.”
Social Security is exempt from any automatic budget cuts that will be triggered if the committee cannot reach a deal by its deadline.