Politics & Policy

The Easy Way to Entitlement Reform: Simply Assume Massive Cuts

Liberals use implausible assumptions to make their spending plans look better.

The Nation’s Ari Rabin-Havt highlights a new progressive argument designed to push off cost-saving reforms to Social Security and Medicare: that these entitlement programs cannot possibly cause a “debt crisis,” as has been projected by the Congressional Budget Office. Why? Because when those programs’ trust funds run out, they’ll institute massive, across-the-board benefit cuts both to current and future retirees, thereby preventing the accumulation of additional government debt. Feel better?

For instance, consider Social Security. The program is running payroll-tax deficits as baby-boomers retire and benefit costs increase. Social Security can redeem Treasury bonds in its trust fund to continue paying full benefits — but only as long as the trust fund remains solvent. And come 2029 (the CBO’s projection) or 2034 (the Social Security Administration’s), the plan’s trust fund will run dry. That’s when things get tricky.

Social Security legally can’t cut checks that the trust fund lacks the cash to pay, so at that point the program will have no choice but to reduce benefits to the level payable by current tax receipts, meaning an approximately 21 percent benefit cut. With Medicare, the situation is a bit more complex, as the program is funded through a combination of payroll taxes, general tax revenues, and beneficiary premiums, but the basic story is similar.

Rabin-Havt and other progressives are taking advantage of an accounting spat between Social Security’s actuaries, who take a more literal “current law” approach to the entitlement system’s finances (that is, they assume that the provisions requiring large cuts will be enforced), and the CBO’s analysts, who are required under budget law to assume that entitlement benefits will continue to be paid as promised even after the programs’ trust funds run short, and that the government will issue debt as needed to keep those promises.

Among people who work on entitlements, the distinction between “scheduled benefits” and “payable benefits” is well understood and not controversial. Both baselines are useful, but the former points toward a debt crisis (because it would require massive borrowing) while the latter points to a retirement-income and health-care crisis (because recipients would not get enough money). Take your pick.

Now, there are a number of reasons why fiscal conservatives might want to embrace “payable benefits” as the new budget baseline, deceptive thought it might be. For one thing, relative to this baseline, even the most extreme conservative entitlement reform plans would increase benefits substantially for future retirees. For instance, when progressive Social Security advocate Nancy Altman writes, “The Bowles-Simpson proposal supported by Social Security opponents would cut benefits of workers earning around $40,000 by almost twenty percent,” she’s comparing the proposal’s terms to what Social Security promises to pay, not what it actually can afford to pay. But using the benefit-cuts baseline that Rabin-Havt quotes Altman as supporting, she would have to admit that the Bowles-Simpson plan increases Social Security benefits. I’m okay with that.

For another, the benefits-cut baseline would also show without doubt that Obamacare increases the budget deficit. Progressives like Jared Bernstein — a senior fellow at the Center on Budget and Policy Priorities (and former chief economist to Vice President Joe Biden) who is cited in Rabin-Havt’s article – states that “Obamacare is clearly reducing the budget deficit relative to earlier projections,” a common claim made when the Affordable Care Act was being debated in Congress. But claims for deficit reduction were made using the CBO budget baseline, in which Medicare continued to pay the current level of benefits even after its trust fund ran out (and the Treasury issued debt to fund those benefits). One of the Social Security and Medicare trustees, Charles Blahous of the Mercatus Institute, has shown that using the benefit-cuts baseline that progressives now prefer, “the ACA will add over $1.15 trillion to net federal spending and more than $340 billion to federal deficits over the next ten years, and far more thereafter.” If that’s what progressives want to say, I’m okay with that, too.

But in the real world, policymakers who want to restrain the growth of entitlement costs need to realize that this kind of situational accounting and shifting of budgetary baselines is just a game. It’s a stalling tactic to put off substantive entitlement reforms, because progressives know that time is on their side when it comes to Social Security and Medicare.

Go back to the late 1990s and you’ll find progressives singing from the same songbook on entitlements, only then it was a claim that Social Security’s projected deficit was the result of pessimistic economic projections by the program’s trustees. Using more realistic assumptions, said progressives such as Robert Reich, the program would remain solvent over the long term. People like me engaged on this issue and showed it to be false: Not only were the trustees projecting slightly faster productivity and wage growth than in the past, but even if the economy did grow faster, it wouldn’t matter much because Social Security benefits rise in line with faster wage growth.

Today, the long-term Social Security deficit has grown — it’s 42 percent larger than it was in 2000 — but you won’t hear progressives apologizing: their argument accomplished its goal, which was to push off any momentum for reform. We’re now 15 years closer to Social Security’s insolvency, and it is dramatically more difficult to fix the system today than it was back in 2000. With every passing year, it becomes harder to avoid trust-fund insolvency with benefit reductions — because they must be phased in to avoid dramatic cuts in benefits — and easier to opt for tax increases, which produce revenues immediately. Moreover, each day 10,000 Baby Boomers switch from being workers paying into Social Security to being retirees collecting benefits from it. It’s not hard to figure out how that affects the political dynamics of reform.

Because much-needed reforms have been delayed, there’s no chance that changes to things like eligibility qualifications could keep the disability program from going insolvent.

To illustrate, one need look only at Social Security’s Disability Insurance program. Due in part to the loosening of eligibility requirements by Congress in the mid-1980s, the percentage of Americans on disability has doubled even as health and occupational safety have improved. As a result of rising costs, the disability trust fund is projected to go insolvent in late 2016, at which time beneficiaries will, under law, be subject to a 19 percent cut in benefits. Problem solved, right?

Of course not. Because much-needed reforms have been delayed, there’s no chance that changes to things like eligibility qualifications could keep the program from going insolvent. And no one — I mean literally no one — is arguing for the massive, across-the-board benefit cuts that a literal interpretation of Social Security law provides for.

Instead, congressional Democrats and the Obama administration propose transferring money from the Social Security trust funds, a step that — because it pushes off the near-term risk of insolvency — reduces the chances of substantive disability reforms effectively to zero. Republicans will almost surely go along, perhaps obtaining some token reforms in the process. But the opportunity for real reforms to a program that desperately needs them will have been taken off the table.

In short, there’s a reason that budget rules require the CBO to assume that entitlement benefits will continue to be paid: because it’s very likely that entitlement benefits will continue to be paid, regardless of what happens to the Social Security and Medicare trust funds.

So, by all means, fiscal conservatives should point out progressives’ shifting accounting baselines and explain what they mean. But they should not take the progressives’ arguments too seriously, because they’re not meant to be taken seriously. They’re meant to provide an excuse to do nothing on entitlements. And the longer we do nothing, the harder the ultimate solution to the entitlement cost problem will become.

Jared Bernstein states that when CBO projections “generate these out-year debt projections that are in the stratosphere, you see a lot of scaremongering based on those numbers.” The reality is, though, that if Congress doesn’t get a little bit scared about rising entitlement costs, they’re very unlikely to do anything about them.

— Andrew G. Biggs is a resident scholar at the American Enterprise Institute.


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