In a year crowded with brusque and belligerent confrontations, Sharron Angle, the Republican Senate nominee in Nevada, may have delivered the most memorable barb of all last week when she taunted Senate Majority Leader Harry Reid—and by extension, the Democratic Party—to “man up” about Social Security’s financial challenges.
Angle’s zinger provided one of the few sparks in a lackluster debate and dominated the subsequent cable and Internet chatter. The problem is that almost everything Angle herself said about Social Security was upside down. She misdiagnosed the cause of the strain on the system. And the solution she offered might compound rather than relieve that strain.
In both her fervor and her confusion, Angle illuminated some of the ideological hurdles that will face any effort to craft a long-term Social Security plan after President Obama’s debt commission makes its report in December. Those ideological tensions could derail the real opportunity that exists to secure Social Security for decades—and not incidentally reassure disillusioned Americans that Washington can tackle big challenges. “It’s quite a manageable problem,” says Robert Reischauer, the former director of the Congressional Budget Office. “It’s a mere shadow of the problem associated with Medicare and Medicaid.”
Angle’s confusion at the debate started with her description of Social Security’s finances. The system, she argued, was heading into the red “because of government taking … money out of the Social Security trust fund” and using it to pay for other operations.
Social Security indeed faces a long-term imbalance between expected revenue and promised benefits. But that’s not because of trust-fund money being diverted into other programs. Historically, Social Security has functioned as a pay-as-you-go system in which the benefits of today’s retirees are funded from the payroll taxes paid by today’s workers. The 1983 Social Security reform agreement between Ronald Reagan and congressional Democrats altered that approach so that Social Security would raise more money than it needs for years to accumulate surpluses before the baby boomers retire.
By law, Social Security can invest those surpluses only in U.S. Treasury bonds, notes Robert Greenstein, director of the Center on Budget and Policy Priorities, a liberal think tank that closely analyzes fiscal issues. Those investments are what Angle calls raiding Social Security. But the Social Security system still owns those Treasury bonds and can convert them to pay future benefits—unless Washington defaults on them, in which case the economy will have bigger problems. “If you argue that those bonds are worthless IOUs,” Greenstein says, “then all Treasury bonds … are worthless IOUs, too.”
Even while running surpluses today, Social Security will face shortfalls as the baby boomers’ retirement vastly increases the number of eligible seniors. In July, CBO projected that by 2040, the program will have enough revenue to pay only 80 percent of promised benefits.
Like many Republicans, Angle says the answer is to divert part of workers’ payroll taxes into private accounts that they can invest in the stock market. But creating those accounts does nothing to balance Social Security’s books; the only way to do that is to reduce benefits or increase revenue. In fact, because today’s payroll taxes are used to pay today’s retirees, diverting some of them into private accounts would require Social Security to borrow huge sums to continue delivering today’s promised benefits.
That realization helped sink the private-account idea when President Bush last proposed it in 2005. And in an interview with National Journal this week, President Obama argued that was one of several reasons to keep the notion interred now. “Given the way Social Security is structured, you’d actually have to borrow a trillion dollars to make up for the money that was siphoned into the private accounts, and this would weaken the solvency of Social Security,” he told me and a colleague. “Moreover, it’s hard to imagine that anybody … would feel real confident [about] putting part of their Social Security into Wall Street accounts after they’ve been watching what happened to their 401(k)s.… So I think that that approach is a nonstarter.”
Instead, Obama argued, the two parties could emulate the Reagan model and “arrive at a sensible solution that [doesn’t] require an overhaul of Social Security’s basic structure.” CBO recently outlined a plausible menu of options for doing just that. Their calculations found the program’s long-term shortfall could be eliminated just by trimming benefits for the top half of earners, linking the retirement age to lengthening life spans, and imposing a partial payroll tax on earnings above $250,000.
Other combinations could work too; the gap between the system’s revenues and obligations, relatively speaking, isn’t that daunting—less than 1 percent of the economy’s expected output over the next 75 years. Closing that gap doesn’t require Americans to “man up” so much as to reach out in a spirit of modestly shared sacrifice that could stabilize the pillar of our social safety net for generations.
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