President Obama infuriated his left flank Wednesday by including in his budget a Social Security reform that ties the rate of its payouts to the rate of inflation. Former Rep. Barney Frank, who called this offer “the biggest mistake of his presidency—politically, morally, and economically,” described his dismay this way: “I don’t want it to be validated by the Democratic president that old people living on a fairly low income, but not very low income, are being overpaid in this society.” This sort of response is why they call Social Security the “third rail” of America’s budget.
But of all the entitlement programs, Social Security is the easiest to fix from a policy perspective. Medicare and Medicaid costs are expected to explode at the end of the decade, partly because baby boomers will sign up in huge numbers and partly because no one has quite figured out how to tame the programs’ spending growth over the next 30 years. Social Security, by contrast, runs on a much simpler equation. It pays beneficiaries based on their lifetime earnings, drawing from cash collected through their payroll and income taxes. It’s a straightforward ledger: Pay in, pay out (although those who live to ripe old ages often end up getting back more than they put in).
As of now, Social Security has enough money to pay benefits in full through 2033, after which time recipients will receive only about three-quarters of what they should. Currently, 56 million Americans receive Social Security payments. That includes senior citizens, people with disabilities, and children whose working parents have died. (Rep. Paul Ryan, for instance, lived on Social Security survivor benefits in his teenage years after his father died of a heart attack at a young age.)
Really, there are only two ways to tweak the Social Security program, says Henry Aaron, a senior fellow at the Brookings Institution: “Raise the rate of payroll taxes, or cut benefits and decide for whom and how much.” It’s an easy enough lift that a handful of Democratic and Republican staffers could figure out a solution in an afternoon.
Although the arithmetic may be simple, the politics isn’t. Social Security changes have always been wildly unpopular because many Americans believe they are entitled to the benefits they’ve spent their lives accruing. That helps explain the beating Obama took this week from congressional Democrats, labor unions, and AARP for proposing to get roughly $230 billion in savings from the so-called chained-CPI fix, the cost-of-living adjustment that also raises revenue by pushing some taxpayers into higher brackets. Or, look at the way President Bush’s plans to privatize Social Security sank much of his second-term agenda.
The Congressional Budget Office estimates that chained CPI, which is a kind of benefit cut, would save $130 billion over the next 10 years. This would close the Social Security funding gap by 23 percent and extend the program’s solvency for roughly 17 years. That $130 billion figure may be lower within the context of the president’s budget, since he has proposed protections for the most vulnerable Social Security recipients, such as veterans and low-income seniors.
The other way to keep Social Security solvent would be to raise payroll taxes. Doing so by 2.61 percentage points would keep the program in the black for the next 75 years, according to the 2012 report from the Social Security Board of Trustees. But that would require another tax hike from Congress—a fix that seems unlikely, given the GOP’s position after the fiscal-cliff compromise.
Bipartisan groups working on deficit reduction have recommended other routes for shoring up Social Security. A panel spearheaded by former Republican Sen. Pete Domenici and former CBO Director Alice Rivlin suggested raising the ceiling of wages currently subject to payroll taxes. It also proposed slightly reducing the rate of growth for wealthy beneficiaries, which would mean that the top 25 percent of Social Security recipients would receive less money.
One reason reforming Social Security is so difficult is that millions of people depend on it for their livelihood into old age. More than 40 percent of people 65 and older would live below the federal poverty line of $11,490 were it not for Social Security payments, according to estimates from the left-leaning Center on Budget and Policy Priorities. As of June 2012, the average monthly retirement check was $1,234 a month. For one-quarter of elderly Social Security recipients, that check represents their lone source of income.
The last time the federal government tackled Social Security was in 1983, when President Reagan and Democratic House Speaker Tip O’Neill cut a deal that extended the program through 2038. (Treasury Secretary Jacob Lew was instrumental in that bargain as a young aide to O’Neill.) The key was that the compromise allowed both parties to claim victory. The Republicans called it a benefit cut, which was true because it rewarded people who retired later in life, and the Democrats called it a tax increase, also true because it raised the income taxes on benefits. The deal was marketable to both parties’ bases, and that’s what saved it.
Chained CPI is certainly one idea that addresses the Social Security dilemma, and GOP leaders have called it a promising idea from the president. There’s just two problems: The Democratic base strongly dislikes it; and even if it’s adopted, it does not go very far in rescuing Social Security over the long run.