The Corner

Economy & Business

On the Insolvency of Social Security

Ramesh has a good article over at Bloomberg about how if we indexed Social Security benefits to prices instead of wages, we would slow down the growth of benefits over time and make the program more financially stable. He writes:

An alternative policy would be to tie Social Security benefits to prices rather than wages. That way future Social Security benefits would keep up with inflation, but would not rise more than that. That policy would eliminate 94 percent of Social Security’s financing gap over the next 75 years. …

The good news is that we don’t actually have to cut Social Security benefits from their current levels to make fiscal progress. We need only stop, or at least moderate, their growth. It would not by itself keep the national debt from rising. But it ought to be part of the solution.

He is right . . . over 75 years.

But I wouldn’t want readers to conclude that all we need to make Social Security solvent is that change, and that once implemented, benefits won’t have to be cut. That’s not what Ramesh is saying, but it is worth clarifying because so many people fail to understand reality and the sad state of Social Security financing.

That reality is that even if we implemented the change suggested by Ramesh today, the trust fund would still be insolvent in 2035, as it would take decades before the wedge created between wage inflation and price inflation is corrected. It wouldn’t be until 2055 or so that costs and revenues would be equal. My colleague Jason Fichtner sends me these useful charts, here.

When the trust fund dries out, unless Congress changes the law, benefits will still be cut by over 20 percent. Considering the latest CBO report, I wouldn’t count on the government’s ability to restore benefits. That’s the reality we face. Republicans in Congress know it. I am sure some Democrats in Congress know it too (they may even know that growing benefits and only raising taxes aren’t good options). Hopefully, someone in the White House knows it.

It means that a refusal to find a way to reform the program now should be taken as lawmakers saying that their position on Social Security is “I support large benefit cuts in 2035.” That’s a crude position but that’s a position nonetheless.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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