In the Nation's Interest
CED’s Way Forward
By Joseph Minarik
There is no live option. In fact, all the options are dead on arrival. At this moment, there is no politically viable idea for addressing the nation’s looming budget problem.
So in a world of dead options, the task is to find the option that is least dead, and pump some life into it. That is why, several months ago, CED suggested the strategy of “saving Social Security first” [see here for a blog post on this topic, and here for a statement from CED's Trustees] to begin the difficult process of turning the nation’s rising debt burden around.
With the recent release of the revised budget outlook by the Congressional Budget Office (CBO), Washington’s interest in hard choices has waned even further. The deficit is projected to decline in dollar terms for two more years; the debt will fall as a share of the GDP from 2015 through 2018 – that is, until three elections cycles from now. The mentality of the body politic is to ignore such a long-term issue. After all, it might just go away.
So this blog post will put these two factors together. The budget problem is in remission, but not cured; and that makes the approach of fixing Social Security as a first step even more appropriate.
So point one: Why should the nation still be concerned about fiscal responsibility, even after CBO reduced its estimates of future deficits? Here are three simple reasons:
Even in the new and more-optimistic estimates, the debt remains too high, and resumes growing faster than the economy before long. Even with CBO’s reduced estimate of this year’s deficit, the debt at the end of the year will exceed 75 percent of our GDP. It is not projected to fall as far as 70 percent, and will be back to more than 73 percent of GDP by 2023. The European Monetary Union was formed with a ground rule that all member nations should as a minimal condition hold their debt-to-GDP ratios below 60. The United States has carried debt burdens this large only during and in the immediate aftermath of major wars.
The smart money would say that CBO’s new numbers are more likely to prove optimistic than pessimistic. CBO projects revenues above the long-term average. It projects a continuation of a slowdown in healthcare cost growth that experts cannot explain. The projection – the “baseline” – omits the consequences of likely extensions of tax cuts and postponements of spending cuts that would sharply worsen the already unacceptable outcomes (adding $2.4 trillion to the debt over the next 10 years, and raising the debt-to-GDP ratio in 2023 to 83 percent). If the economy grows faster than forecast, interest rates will rise sooner and farther for our already excessive stock of debt. And any prospects of faster growth in the United States must swim against the tide of slow growth overseas.
Excessive debt is a slippery slope. Debt begets debt service, which begets deficits, which begets more debt – and the cycle continues. The nation will not know whether it has stepped too far down that slope until it is too late – at which point the damage will be catastrophic. We should not take such a risk.
But does the new CBO outlook change the picture? By no means fundamentally; but somewhat. However little time the nation had to deal with the budget issue, we now have a little more. That can allow greater deliberation to get it right. The extra time also is helpful in a weak economy with an especially weak job market. The horns of the dilemma are that we need to bring our annual deficits down, but we cannot crunch this tentative recovery. The more-favorable economic outlook gives us a little bit more room to sneak between the horns.
And that is one of the key reasons why starting our budgetary repair by “saving Social Security first” is the least-worst idea in the dead-letter house. Set the rest of the budget aside. We aren’t going to deal with all of those issues this year anyway. Take just this one (big, difficult, crucial) thing and get it done.
The reflex reaction of every political sophisticate will be that rebuilding the finances of Social Security is an impossible task. That is largely because every political sophisticate has missed the reality that every other approach is impossible, too. If there were some way to get people to recognize that reality and listen, here are six reasons why we believe that Social Security refinancing is the best place to begin.
Almost everyone understands that Social Security’s finances need to be repaired sooner or later. By the middle of the 2030s and under the current law, the Social Security trust fund (more on that concept in a moment) will be exhausted, and benefits must be cut by approximately 25 percent across the board. And that means all benefits – even for the 85 year-old widow in the walkup, cold-water flat; even for the totally disabled former worker. Some still argue that the balance in the trust fund means that action can be postponed for another 20-some years. But most people know that procrastination and acting in crisis is not a sign of maturity. And most informed people also understand that even today, as Social Security draws down its trust-fund balance, the Treasury must borrow more money from the public to pay the Social Security benefits that are due – and the amount of money that the Treasury must borrow from the public, not the amount of the “deficit,” is our real fiscal and financial problem.
As particular budget problems go, the Social Security issue is comparatively predictable, and comparatively well understood. No step to reduce the deficit is politically easy; someone’s taxes must go up, or someone’s program must go down. However, technically, Social Security has been analyzed up, down and sideways for many years. The pros and cons of the possible steps to reduce its payments or increase its receipts are by now widely understood. Furthermore, although no one knows the future, the coming paths of receipts and benefits are known with greater precision than, certainly, healthcare costs, for one example. Politics aside, by the technical scale of the coming essential reform of health care, Social Security refinancing would be batting practice.
The budget impact of a Social Security repair can be almost exclusively in the longer run. Almost all elected policymakers would like to postpone any increases in Social Security taxes and reductions in benefits as long as possible. Most economists would advise postponing tax increases and spending cuts as long as possible, to avoid crunching our still-tentative economic recovery. So here is the rare occasion where elected policymakers and economists can link arms and march in step. The usual rule of thumb is that benefit reductions should not apply to Americans over age 55, because people need some minimum fair warning to adjust their plans for when to retire and how much to save until they do. The effective dates of Social Security tax increases could be postponed as well – ideally not the 10 years or so of grace that we allow for benefit reductions, but at least some interval – and still contribute their share to stabilizing the system’s finances. That means that action on Social Security could be taken now, but with little impact on the economy until the recovery has time to take firm root.
Social Security repair would send a strong positive signal to the financial markets. Even with its fiscal impact postponed for several years, action on Social Security would tell investors in the United States and around the world that elected policymakers in Washington can do their jobs. It would take a growing slice out of the long-term debt problem, which would be far more constructive than the contrived, inefficient, unsustainable spending sequester. After real action to deal with the Social Security problem, the markets would cut Washington some slack to deal with the rest of the budget problem (and admittedly health care is far more important than Social Security) on a timetable that would both spare the economic recovery a premature hit and allow the Congress and the President to take their time and do it right.
Social Security repair would send a strong positive signal to today’s workers. The tale of the poll showing that younger Americans have more faith in space aliens than Social Security is an urban legend. However, it is likely that few younger workers have unshakeable trust in what policy wonks routinely call America’s most successful and most popular public program. The typical American worker surely cannot recite the most recent annual Social Security Trustees’ report from memory. However, the typical American worker viscerally understands that the program cannot keep its current promises. Refine those promises to a size that the nation can keep, and see what it does to trust in our collective future and trust in government.
Social Security repair, taken by itself, can be politically balanced. And finally, here is perhaps the most important point: Some clearly assume that repairing Social Security’s finances net-net would be a concession by Democrats and a political win for Republicans, and therefore that addressing Social Security without including other issues is not politically viable. But that is not the case. Think 1982-83, when the “Greenspan Commission” formulated Social Security proposals which, with further refinement by the Congress, earned bipartisan support (and minority bipartisan opposition). The concessions would have to come from both sides. Democrats would have to yield the political argument that Social Security does not increase the “deficit” (carefully defined to meaninglessness to make it so). Republicans almost surely would have to yield the insistence on private individualized investment accounts, and the refusal to raise taxes. Between those two positions lies plenty of room for a compromise that would be equally painful and equally rewarding for both parties – and good for the country.
So don’t bother looking for a slam dunk. This is a game among orthopedic surgery patients (at best) facing a 12-foot basket. No budget proposal yet formulated or still in the ether will garner instant majority support.
But among the bodies at hand, “saving Social Security first” may come the closest to having a pulse. We would be well advised to get out the paddles and give it a shot, er, shock, and see if we can generate signs of life.