The congressional tantrum over Obamacare ended—as most such outbursts do—with lingering sniffles of discontent, general weariness, and stern recriminations. But it also ended, somewhat surprisingly, with most of the adults in the room talking quietly about a grand budgetary bargain centered on “entitlement reform.” For Tea Partiers, this was the last desperate target of the shutdown; for centrist Republicans and Democrats it marks the reprise of a monotonous—and utterly false—conviction that Social Security is some sort of time bomb ticking away in the bowels of the Treasury. “Washington has yet to address the main threat to the nation’s solvency, as USA Today concluded breathlessly last week, “the growth in entitlement programs.”
These attacks are as old as the law itself, and their arguments—that Social Security is an affront to American values, a burden on employers, and a false promise to workers—can still be heard today. But given the pension program’s spectacular success and popularity, opposition is now almost always couched as a simple matter of fiscal realism and responsibility: “We love Social Security (and Medicare/Medicaid), we just can’t afford it.” This argument rests on a series of willful and persistent myths:
Social Security has “exploded” as a share of the federal budget. Yes, social security has grown: the pension program represent about 1 percent of GDP in 1950, and now is about 5 percent of GDP (Medicaid and Medicare account for another 6 percent). But revenues—96 percent of which come from a dedicated payroll tax–have grown alongside the spending. The growth of social security is not some fiscal accident. It is a sustained political choice informed by the demonstrable benefits of a program that lifts 22 million Americans—most of them seniors, but over a million of them children—out of poverty.
Social Security faces a “grey tsunami” as the baby boomers retire. In this view, social security’s prospects rest almost entirely on the shifting ratio between current workers and retirees. First, this is scarcely a surprise: politicians and the social security trustees have recognized this demographic challenge for years. Second, there are lots of moving pieces here—and equitable wage and productivity growth are far more important to the program’s future than any demographic bulge. There is nothing preventing us from matching projected wage growth with modest tax increases to sustain a valued and successful program.
Social Security is going “broke” or “bankrupt.”This claim willfully misrepresents the relationship between program revenues and program commitments. Social security outlays have exceeded revenues since 2010, and—at current rates—the trust fund itself will be exhausted in about 20 years. But that doesn’t mean everything grinds to a halt. In the absence of any changes, current revenues could still cover three-fourths of scheduled benefits after 2033. In the big picture, the shortfall is actually pretty modest (about 1 percent of GDP over the over the next 75 years)—and, as I trace below, easily addressed by modest reform.
Entitlements are out of control. The slippage here is both persistent and intentional. The combined costs of Medicare, Medicaid, and Social Security are employed to argue for cuts in all three. But, however you stack up those lines, the trajectory of Social Security as a share of GDP is essentially flat. The problem with entitlements is not—as it is often implied—the fact that they are entitlements. The problem is that we spend twice as much per capita on health care than any of our peers. Using that fact to argue for cuts in Social Security is like responding to a hike in gas prices by throwing out your bicycle.
With the debate framed in this way—in which social security is off the rails, out of control, or just plain broke—the accompanying solutions are almost always confined to real or effective program cuts—including lower monthly benefits cuts (accomplished directly or by tinkering with the calculation of inflation behind the cost-of-living increase) or a higher retirement age.
The alternative—barely voiced outside a few progressive policy shops—is to do what we have always done: adjust the tax rate and tax base to ensure long term solvency. The graphic below summarizes these adjustments over the history of the program. The green line traces the increase in the payroll tax rate since 1937; the blue line traces the increase (in real, inflation adjusted dollars) in the taxable base. So, in 1950, employers and employees split a 3 percent rate on the first $25,000 in earnings; in 1980, the rate was 9.04 percent on the first $69,000 in earnings; in 2013, the rate was 10.6 percent on the first $117,000.
There is substantial room here to raise both tax rates and the tax cap. The tax rate has not budged since the 1990s, and the latest Social Security Trustees report projects wage growth sufficient to absorb a modest increase. And the tax cap (which is indexed to average wage growth) has failed to keep pace with widening inequality. As the share of wages flowing to high earners grows, the social security wage base suffers. Raising that base, or having it kick in again once incomes reach a certain point, would yield little hardship and considerable new revenue. These options, and their impact, are summarized in the graphic below. The red line is spending (outlays) as a share of GDP; the blue line is revenues. The grey area to the left summarizes program history since 1973; the area to the left projects revenues based on a menu of reform options. These options (drawn from a 2010 report by the Congressional Budget Office) are not meant to suggest a clean solution, but simply to illustrate the impact of immediate or staged increases in the tax rate, the taxable wage base, or both. The upshot is clear: if we get past the hyperbolic myths and misconceptions, it actually doesn’t take much to weather the entitlement crisis, ride out the demographic tsunami, or defuse the fiscal timebomb.