The 2004 campaign is under way, and finally the political world has turned its attention to the single most important domestic policy issue we face: Social Security.
In comments before the House Budget Committee on Wednesday, Fed Chairman Alan Greenspan inadvertently ignited a firestorm that spooked the media, frightened retirees and put the election-year spin machines in high gear — all because he told the truth.
Mr. Greenspan railed against mounting government debts. He expressed special concern about the huge longer-term debts associated with Social Security and Medicare. He suggested that future Social Security benefits could be cut to reign in the long-term Social Security debt, which will materialize after the Baby Boomers begin retiring in 2010.
The message being filtered to through the news media, however, is that Mr. Greenspan is suggesting that high budget deficits in other parts of the government can be reduced by cutting Social Security benefits. That has everyone scared — without cause.
The AARP said, “The notion that Social Security should be a prime target to fix future budget deficits that are unrelated to the program is irresponsible.” Democratic presidential hopeful John Kerry said “the wrong way to cut the deficit is to cut Social Security benefits.” Senator John Edwards said that “it is an outrage” for Mr. Greenspan to suggest that Social Security benefits be cut.
Unfortunately, they are all missing the point.
Mr. Greenspan should be saluted for initiating a discussion over the future of Social Security, and the need to address the problems sooner rather than later. True, other parts of the federal budget are facing deficits. The deficit for last year alone was near $500 billion. But that pales in comparison to the long-term debt faced by Social Security.
According to the Social Security Administration, in just 14 years — in 2018 — Social Security will begin paying out more in benefits than it collects in payroll taxes. From that point on, Social Security will run increasing annual deficits. If you add up all the deficits for the next 75 years, Social Security faces a long-term debt of more than $27 trillion.
By mid-century, we will have to cut Social Security benefits by more than a quarter, or raise taxes by 36 percent. By 2070, we will have to cut benefits by a third or raise taxes by half.
If we don’t want to raise taxes or cut benefits by 2050, we will have to cut all other government programs by 20 percent to free up enough money to pay Social Security’s debts. And that doesn’t include Medicare, which faces a debt three times larger than Social Security’s.
All this is happening because America is aging. When Social Security began, there were 42 workers paying into Social Security for each retiree collecting benefits. Today, the ratio is three-to-one. Between now and mid-century, after the retirement of the 77 million baby boomers, the ratio will decline further to two-to-one. We cannot afford to keep the program as it’s currently structured.
Mr. Greenspan’s comments were intended to highlight these problems. He said, “If this fundamental change in the age distribution materializes, we will eventually have no choice but to make significant structural adjustments in the major retirement programs.”
He is right.
Mr. Greenspan further suggested that perhaps we could reduce Social Security’s costs by reducing the cost of living each year for future retirees and increasing the retirement age to keep up with rising life expectancies.
He didn’t make these suggestions to cover up debts in other federal programs. He made these recommendations to reduce the debt within the Social Security program. After all, even if we get all other federal spending under control, the $27 trillion Social Security debt will still remain.
The prospect of benefit changes for Social Security is not a popular option for anyone. But if decision-makers in Washington can’t find another way, Mr. Greenspan’s suggestions may well be unavoidable. But there are some caveats that must be included.
First, current and near retirees should be protected. Benefit changes should apply to younger workers and future generations.
Second, personal retirement accounts must be incorporated into the system. That way, younger workers can make up any losses in benefits with the savings in their accounts. Research by the National Center for Policy Analysis, as well as figures from the Social Security Administration, show that personal accounts can provide benefits equal to what today’s retirees receive, adjusted for inflation. In the meantime, personal retirement accounts can eliminate Social Security’s $27 trillion long-term debt.
But we’ll never find a solution if those who simply point out the problem are misinterpreted and attacked.
Matthew Moore is a Social Security analyst for the National Center for Policy Analysis.