Social Security and the Budget Mess

President Obama is now widely acknowledged to have defaulted on his leadership obligations by opting for an election-driven budget that ignores economic reality and the guidance of his Fiscal Reform Commission. Fortunately, there are signs that a bipartisan group of senators is willing to step into the vacuum and take steps to roll back the growing debt that threatens the foundation of our prosperity and freedom.

But not so fast! Suddenly Democratic leaders Reid and Schumer, with at least the acquiescence of President Obama, are demanding that Social Security be excluded from any effort to deal with the federal budget outlook. They argue that Social Security has nothing to do with the deficit and should not be part of any solution. This reveals a terrible misunderstanding of economic and budgetary facts.

The prospect of tripling federal debt, rising debt-to-GDP ratios, and ever-increasing interest costs send the message to international capital markets that the U.S. is planning to become an increasingly risky borrower. Lenders will respond by demanding ever-higher risk premiums — higher interest rates — and may demand higher taxes before continuing to lend. The U.S.’s current fiscal future promises to involve higher interest rates, higher taxes, or both.

In the other direction, a serious plan now to address the prospect of higher debt would eliminate those interest-rate and tax threats. That is, it would be the single best pro-growth policy the federal government could adopt.

A casual examination of the budget shows that entitlements — Social Security, Medicare, Medicaid, and Obamacare — are already 60 percent of spending and on track to explode. As the Fiscal Reform Commission made clear, entitlement reform is the heart of addressing what it described as America’s “moment of truth.”

Obviously, any immediate improvement in the outlook for entitlement spending would send a valuable signal to credit markets and improve our economic outlook. Naturally, it would be good to focus on the big dollars in Medicare, Medicaid, and Obamacare, but the administration has taken health programs off the table. Republicans will try, but the only promising area for bipartisan entitlement reform consistent with long-term economic growth is Social Security.

In sum, from an economic-policy point of view, Social Security reform is the most important thing that a bipartisan group of senators could do. As the past two years have proven, the liberal leadership has it exactly backwards.

And Social Security does affect the deficit. At present, Social Security is running a modest cash-flow deficit, increasing the overall shortfall. As the years pass, these Social Security deficits will become increasingly larger. They are central to the deficit outlook.

One hopes that entitlement reform, especially Social Security, will remain a priority for the 112th Congress. Republicans in the House have committed to include these reforms in their budget. Senate Republicans cannot control the agenda, but one should not be surprised to see some conservative senators assuming the leadership mantle and pushing for Social Security reform.

It would be nice to see someone in Washington willing to lead.

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