According to the Washington Post, “President Obama has decided not to endorse his deficit commission’s recommendation to raise the retirement age, and otherwise reduce Social Security benefits, in Tuesday’s State of the Union address.”
Democrats are happy. Taxpayers, on the other hand, should start worrying, stop counting on the promises made about future benefits, and start saving money for future increases in taxes. For one thing, by refusing to reform Social Security, President Obama is guaranteeing automatic benefit cuts of about 22 percent for everyone on the program in 2037 (when the trust funds run dry) without having had retirees plan for a replacement income. On the other hand, if in this distant future, Congress does what it does best–cave to special interests (in this case future seniors who won’t be happy to see their benefits cut)–then taxpayers will have to pick up the tab.
Of course, things will get dicier for the American people long before 2037. In 2015, the Social Security Trust Funds will run out of cash because the program will permanently start paying out more benefits than it collects in taxes. At that point, the program will start redeeming the IOUs in the trust funds to pay benefits to current seniors. At first, they will cash in the interests supposedly earned over the years, then in 2025 they will redeem the assets themselves until they dry out. But here is the problem. The federal government doesn’t have that money any more because it spent it on stimulus, education, green jobs, and more daily consumption. Then what? Well, it means that in order to repay the program so it can continue to pay out benefits at the promised levels, the federal government will have to borrow more money, increase taxes to get more revenue, or print more dollars. None of these options are good for the American people but it probably beats the alternative of not paying the benefits of current retirees.
By refusing to reform Social Security today, the president is telling the American people that he chooses the road to more taxes, more borrowing, or unanticipated benefit cuts for seniors already in the program.
My colleague Jason Fichtner and I just released a paper about the Social Security Trust Funds to explain how they work and how Americans can count on them, or not.The whole thing is here.