Denial, as the saying goes, is not just a river in Egypt.
Last week, the Congressional Budget Office (CBO) released a report suggesting that there will be a slightly lower actuarial deficit and a later insolvency date than had been previously estimated by the Social Security Administration itself. Opponents of Social Security reform immediately seized on the reported improvement in Social Security’s finances to argue against taking action to fix the program. Rep. Robert Matsui (D-Calif.) said the report proves “radical reforms are unnecessary.” Barbara Kennelly of the National Committee to Preserve Social Security said, “It would be absurd for policy-makers to drastically alter the program based on those numbers.”
But one wonders if these critics of reform actually bothered to read the report. If they had, they would have seen that CBO’s analysis is simply more bad news for the nation’s troubled retirement program.
Among the report’s findings:
The report, which uses more optimistic technical assumptions than the Social Security Administration, indeed shows a tiny improvement in Social Security’s fiscal outlook, albeit at the price of lower benefits. For example, Under CBO’s assumptions, Social Security will begin running a deficit by 2019, one year later than estimated by SSA. That hardly seems like something worth celebrating. The CBO estimates that the Social Security Trust Fund will be exhausted by 2052, 10 years later than the SSA projects. This is largely the result of assuming an increase in the interest rate attributed to the bonds in the trust fund. However, the report notes, “those Trust Funds are mainly accounting mechanisms and contain no economic resources.”
In other words, the Trust Fund doesn’t actually do anything to help pay Social Security benefits. We could set the interest on the Trust Fund bonds to 100 percent, make the system technically solvent for years, but do nothing in reality to increase funding for the program.
Simply, even using CBO’s more optimistic technical assumptions, Social Security remains unsustainable: unable to pay promised future benefits given current levels of tax revenue. The report concludes that “unless taxation reaches levels that are unprecedented in the United States, current spending policies are likely to result in an ever growing burden of federal debt.”
Critics of Social Security reform were also quick to cite the report’s conclusion that the present value of the long-run actuarial deficit for Social Security is approximately 1 percent of payroll, or $3.7 trillion, compared with 1.9 percent estimated by the SSA. Nearly 4 trillion dollars is still real money, even by Washington standards. However, “actuarial solvency” is the least rigorous and relevant measure of Social Security’s financial situation. For example, it does not include the cost of redeeming bonds in the Social Security Trust Fund or consider costs beyond the actuarial window. Better measures, such as “infinite horizon” projections would show a much worse fiscal picture.
On top of that, the CBO achieves much of its savings by assuming lower benefit payouts in the future. That is, the CBO expects Social Security to become an even worse deal for younger workers in the future. Imagine what would have happened if some politician had suggested that we could buy a few more years of actuarial solvency by slashing Social Security benefits. Would Matsui or Kennelly be celebrating?
The report does not address Social Security’s many non-financial issues: unfairness to working women and minorities, the lack of property rights, or the drain on national savings—all of which provide further arguments for reform. In fact, in the end, the biggest reason for reforming Social Security is not a question of getting the lines to cross on a budget chart. It’s about giving Americans ownership and control over their own money.
The upcoming election promises to give voters a clear choice. On one side will be those like President Bush who want to create a better, more secure retirement system by giving younger workers the chance to save and invest their Social Security taxes through individual accounts. On the other side, Ms. Kennelly and Rep. Matsui will keep on whistling past the graveyard.
That’s a debate that can’t start too soon.