Social Security brings in more revenues from workers’ payroll taxes than it pays out to retirees. But as the baby boomers reach quitting time, that is going to change. We have known this for some time. In 1991, the program’s trustees predicted that it would start bleeding money in 2017. That’s their latest prediction, too. But we have done nothing in the intervening 15 years to avoid the coming fiscal shipwreck. And every year we do nothing, the cost of righting our course goes up.
Since 2003, the cost of fixing the program has gone up by $1.8 trillion. And that cost estimate just reflects the fact that the day of reckoning is getting closer. There are additional costs to delay. Every year, more people retire and their benefits become politically untouchable.
In recent weeks administration officials and a few Democrats have talked about the possibility of reaching a deal on Social Security. It seems pretty clear that Democrats will not accept any deal that involves letting workers invest some of their Social Security taxes in personal accounts. Some conservatives have concluded that any deal without such accounts is not worth making. As much as we favor personal accounts, we disagree. A deal would have to be carefully negotiated, but conservatives ought to be willing to contemplate one.
Two years ago, Bush was so eager to enact personal accounts that he signaled his openness to tax increases to get them. If personal accounts are off the table, the tax increases should be, too. That leaves three possible areas for cooperation.
First, the program could be put on a sound fiscal footing by reducing the future growth of benefits. Republicans will like this proposal better than Democrats, but few Democrats have ruled it out. Second, the government could provide tax credits to help low-income workers begin investing. Democrats have proposed this policy for years, and Republicans have objected. But if Republicans are as interested as they say they are in expanding the investor class — and they should be — they should drop their objections. Third, the taxes that fund Social Security could be made more progressive. There is a cap on the amount of wages that is subject to the payroll tax. That cap could be raised. This is where Democrats want to go, and Republicans have good reasons for resisting: It would increase marginal tax rates for the affected workers quite a bit, and it would not raise much money. But if the cap were not raised much, and the revenues gained were used to fund the tax credits or to lower the payroll-tax rate, Republicans might find their objections dwindling.
The editors of the Wall Street Journal worry that any deal would lead to permanent tax increases and temporary spending cuts. Congress might vote to cut future benefits, it argues, but a future Congress could then increase them – as Congress routinely did in the 1960s. It could happen. But Congress could increase future benefit levels now, and it has not done so in decades. And Medicare will be exerting severe financial strain on future budgets, restraining Congress from adding more to Social Security.
A deal offers the possibility of a reduction in government’s unfunded liabilities, an expansion of the investor class, and a rare bit of bipartisan comity. It may be that even if the Republicans go as far as they reasonably can, the Democrats will refuse to make any deal. But Republicans are right to invite them to the table.