Earlier this month, the Trustees of the Social Security Trust Funds released another set of figures underscoring the dreary outlook for the program. As usual, pundits took the opportunity to bash Congress as a collection of do-nothing ne’er-do-wells on the issue of entitlement reform.
This sequence has been going on as long as I can remember. It begs the question why Congress has done so little on the question of Social Security, which House Majority Leader Ryan has called “the most predictable crisis in history.” Every year, Congress sits idle as the largest program in the entire federal government swirls yearly closer and closer to crisis.
Contrary to popular opinion, there is substantial support for Social Security reform at the grassroots. Current polling shows that even a majority of current seniors believe that the system is heading for crisis. The Social Security Administration expects nearly half of those people turning 71 today will be alive when the program is subjected to automatic cuts.
The support is, however, highly diluted across dozens of reform ideas and concepts. There is no consensus, or willingness of voters to embrace clichés as dogma has reduced the discussion of Social Security reform to a shouting match. In the process, hyperbole is routinely mistaken as fact, creating networks of impenetrable voting blocks that no politician wants to alienate. Reason has left the building.
“Eliminate the Cap, Problem Solved”
This voting block is unwilling to talk about benefit cuts—period. To them, the eternal solution is no more complicated than asking the wealthy to “pay their fair share”.
The Social Security Administration believes that this proposal deals with 67 percent of the short-term solvency issue. The Congressional Budget Office believes it is closer to 40 percent. Mind you, the definition of “solved” doesn’t mean that there is no problem. It is the cost to kick the can a few years down the road.
The Congressional Budget Office also believes that changing the payroll tax structure would encourage workers and employers to restructure compensation. They might, for example, take more pay in non-taxable income. Employers would reduce wages to reflect the higher employment costs. In short, income tax collections would fall as a result of changing Social Security.
“Just Put the Money Back”
The subscribers of this theory have nearly zero tolerance for reductions in benefits. To them, the Social Security Trust Fund is real, and Congress simply needs to repay the loans in order for Social Security to meet its obligations forever.
The fact is the numbers provided by the Trustees assume that every penny ever borrowed will be repaid with interest. In the most recent report, they forecast that the system has $13.2 trillion of unfunded obligations. If the government actually defaults on the obligations held by the trust fund, the liabilities rise dollar for dollar.
“The Money Was Spent On Other Government Projects”
This audience has zero interest in raising taxes which they believe will only encourage Congressional abuse of the system.
People typically assume that any surplus held by the system is excess contributions that the government has siphoned off to offset other spending priorities. In fact, Social Security draws revenue from three different sources, payroll taxes, interest, and general fund subsidies. Since inception, the program has collected roughly $2.9 trillion more than it has spent. The vast majority of that 'surplus' is interest and interest on interest. The second largest component is general fund subsidies. The final component is excess cash.
If you take all of the excess contributions, it is not enough to pay for the general fund subsidies to the system. In other words, every penny ever borrowed from the program has been spent on one program: Social Security.
“Just Accounting Gimmicks”
The idea of interest payments and Social Security generally draws snickers from the audience. Many people discount this cash-flow as little more than a left-pocket/right-pocket accounting gimmick. The economic sleight of hand has left many voters with the false impression that the system will continue to operate fine with or without the interest payments.
That is a seriously dangerous misconception. For decades, there was a measure of gimmick in the mechanics of the system. Almost since inception, the vast bulk of interest was paid to the system by an internal credit, completely invisible to the broader economy. If the government owed a billion dollars, the system would generate a billion dollar bond held by the Trust Fund. In fact, about a dime of every dollar of debt has been issued by the government with the push of a button. This process has quietly created more than $2 trillion of debt with a short maturity.
Over the next decade the redemption process of this obligation will leave a larger and larger footprint on the economy. In 2018 the trustees expect the program to collect about $80 billion in interest all of which will come from the general fund. Over the next 10 years, the government will need to raise $1.7 trillion to pay not only current interest, but the principal of the bonds as well. This isn’t a gimmick.
Politicians and Consensus
Politicians aren’t natural leaders. They are followers, who attempt to gather public support that is already there. In the case of Social Security, there is unfortunately no way for lawmakers to follow voters through the maze of myth and hyperbole that has cemented itself in the public conscience.
Voters do not agree upon what Social Security is. They differ upon the causes of the system’s ailments, and the impact in the future. There are people who in the face of the crumbling finances believe the answer is to spend more. Instead of trying to bridge these divides, politicians seek to absolve themselves for the outcomes. They blame demographics caused by Americans living healthier lifetimes. All of them want to preserve Social Security, but see their colleagues intimidated by older voters.
It is entirely reasonable if not predictable that Congress does nothing under the circumstances. Why voters accept it is less understandable.