In his recent press conference, which was dominated by discussion of the administration’s budget proposal and its failure to address rising entitlement costs, President Obama was careful to distinguish Social Security from the other main entitlement programs. Responding to a reporter’s question, he said: “You talked about Social Security, Medicare, and Medicaid. The truth is Social Security is not the huge contributor to the deficit that the other two entitlements are.”
This has become a more or less standard talking point on the left, and it is likely that Obama echoed this statement in part to placate the liberal wing of the Democratic party, which fears the president may go too far in accommodating those who wish to get present and future budget deficits under control.
The argument has some merit. Over the long term, Medicare and Medicaid costs do outstrip the growth of Social Security. But it’s wrong to conclude, as Senate Majority Leader Harry Reid apparently has, that Social Security has no role to play in budget or entitlement-reform negotiations.
Social Security’s cost increases will be largest in the short term as 10,000 Baby Boomers per day shift from work to retirement. Medicare and Medicaid’s cost increases are largest over the long term, as the compounding effects of rising health costs produce mind-boggling levels of program outlays. But these long-term costs are in a way academic: If lawmakers do not find a way to address entitlements within the coming decade, a budgetary or currency crisis seems inevitable. The long term matters less when the short term is sufficient to do you in.
Moreover, saying that Social Security isn’t a big part of the budget problem isn’t to say that Social Security doesn’t have a budget problem. Put simply, the non–Social Security federal budget faces a significant shortfall, driven in the short term by the recession (and new spending justified by it) and in the long term by rising Medicare and Medicaid costs. Social Security, likewise, has a significant long-term budget shortfall due to the aging of the population.
To make Social Security permanently solvent without benefit cuts would require an immediate and permanent increase in the payroll tax from 12.4 percent of earnings to 15.7 percent, a more than one-quarter increase. If we wait, which appears to be what President Obama and Senator Reid want to do, then the required tax increases only grow: to 16.2 percent of pay if implemented in 2020, or 16.8 percent if we wait until 2030. The short story is that when you know you have a gap to fill, the sooner you start, the easier it will be to finish.
Moreover, the root cause of Social Security’s insolvency — population aging — also lies behind a good chunk of Medicare and Medicaid’s rising costs. Over the next two decades, the simple graying of the population accounts for around two-thirds of the total increase in entitlement costs. Rising per-person health-care outlays, which the administration likes to target as the main culprit, don’t become the main driver of entitlement costs until the 2050s.
To the degree that we succeed at countering the effects of population aging — such as through policies to encourage larger families, longer work lives, and increased saving — we will benefit not only Social Security, but other entitlements and the budget as a whole. And, as it happens, many of these policies could work through Social Security. For instance, increasing the Social Security retirement age would keep Americans in the workplace longer, during which time they would pay Medicare and income taxes. Likewise, if a cut in payroll taxes for workers with children encouraged larger families, the budget as a whole would benefit from increased future labor forces. Social Security is such a large program that its policies affect individual decisions on how much to work, how much to save, and when to retire. But the effects of these decisions extend far beyond the Social Security program itself.
The liberal talking point that fiscal hawks are targeting Social Security to fix deficits generated elsewhere in the budget is just false, and easily disprovable when you examine what the hawks actually propose for the program. These changes almost never generate significant savings in the short term. Rather, plans such as those from the president’s fiscal commission and the Bipartisan Policy Center’s budget taskforce put in place gradual changes to taxes, benefits, and the retirement age to extend the solvency of Social Security itself, not cover up deficits elsewhere in the budget.
It’s easy to pooh-pooh rising Social Security outlays, which compared with the long-term increase in Medicare and Medicaid costs are relatively modest. But it’s important to remember that Social Security’s cost increases are modest only in comparison with Medicare and Medicaid. After all, Social Security is the largest tax most workers pay, the largest source of income for most retirees, and the largest single domestic spending program of the federal government. And over the next two decades, Social Security outlays will rise by 25 percent relative to its tax base. Viewed on their own terms, Social Security’s rising costs should be cause for concern.
There is one final reason to reform Social Security now: We know how to do it. Unlike health care, Social Security is a mature policy issue where the options available are well known and understood. As the recent health debate illustrated, it’s not even clear many reformers truly know how to cut health costs. Also unlike health care, where the disparate paths of greater government control and greater individual control are difficult to bridge, Social Security reform is open to compromise that calls on proposals from all sides.
In the short-term, the budget deficit isn’t driven by any of the entitlement programs. Over the medium term, Social Security, Medicare, and Medicaid all contribute. And over the long term — well, if we don’t get on top of these issues soon, there won’t be a long term: All the entitlements will effectively fix themselves by going broke. This doesn’t strike me as much of a strategy to win the future.
— Andrew Biggs is a resident scholar at the American Enterprise Institute.