It isn’t easy to find a single word to define Social Security. It isn’t exactly “insurance,” because the recipients don’t have property rights in the assets in the trust fund, but it isn’t completely “welfare,” either, because there is a correlation between the funds each recipient pays in and takes out of the system. I guess you could call it a hybrid, which sounds a lot better than “Ponzi scheme,” Trump’s description of it in years past.
The following facts about Social Security cannot be disputed:
1. The system is popular. There is no groundswell of support for privatization, or for massive cuts, even among GOP voters.
2. Social Security makes up a large proportion of the incomes of the elderly; that proportion is likely to rise in the future. This is due to inadequate savings, which in turn was largely caused by stagnating wages.
3. While the system has chronic funding problems, it is in no danger of “going broke.” The Reagan era modifications to the system were designed to address future deficits caused by demographic problems by creating a large surplus in the Social Security Trust Fund. The system is now running deficits, which will get worse as the baby boomers retire. As a result, the assets in the Trust Fund will be exhausted sometime after 2030, and taxes will fund only about 80 percent of projected benefits. If no action is taken to address the deficit by that time, beneficiaries will be looking at a 20 percent cut.
4. Previous efforts to guarantee the solvency of the system had bipartisan support in Congress. That is unlikely to be true today.
The partial privatization of the system was suggested by the Bush Administration, partly due to its ideological affinity for solutions involving the private sector, and partly in the hope that higher returns from the market would fill in the funding gap. Leaving aside the serious possibility that beneficiaries could lose, rather than gain, by making more speculative investments, the problem with privatization is that it blows an even bigger fiscal hole in the system, because it results in less money being available to pay the current beneficiaries. In light of that, and the previous Bush political debacle, I don’t think privatization will be pushed seriously in the next administration.
There are a number of ways available to address the funding gap. These include:
1. Raise the earnings cap. As it stands today, people with incomes above the cap pay a lower marginal tax rate than people below it, which makes no sense. The down side to this approach is that, unless you also increase the payouts to rich people, it diminishes the “insurance” part of the hybrid scheme.
2. Increase the retirement age. Business interests prefer this approach, because it increases the size of their worker pool and thus keeps wages down. For demographic reasons, increasing the retirement age makes some sense, but it is unfair to blue collar workers, who are frequently in no physical condition to work longer.
3. Change the cost-of-living formula. Obama was open to this as part of a “grand bargain,” but it never happened.
4. Raise the tax rate. Do we really want to make labor even more expensive than it is today?
5. Let the default cuts kick in. Seniors rely on Social Security for their retirement income. Doing nothing will tear huge holes in their financial plans.
Realistically, the most politically palatable way of dealing with the funding gap would be to employ several of these tools in moderation. That would require the cooperation of both parties, however.
My prognosis: Trump campaigned against Social Security cuts, and the GOP has shown less interest in the subject since the failure of the Bush plan. There will be some talk about Social Security reform, but the GOP will look to the Democrats for political cover, and will not get it. The issue will be kicked to 2020.