The cowboy philosopher Will Rogers once said, "If you find yourself in a hole, stop digging." Unfortunately, his advice is often ignored in Washington, where the answer to our national debt is more government spending and the policy prescription for a slow economy is to favor special interest groups.
Take one of the latest trends, for example. Faced with the reality that Social Security is insolvent, some politicians are pushing for an increase to benefits rather than reforming it. In fact, according to The Wall Street Journal, "legislation increasing benefits, and boosting payroll taxes to cover the cost, now has 58 co-sponsors in the House."
That's what Rogers would call digging a hole. Even if politicians raise taxes to pay for the new spending, the program is in dire need of reform. The latest Social Security trustees report, released last summer, reiterated the fact that the program is broken.
Since 2010, Social Security has been running a constant cash-flow deficit, meaning that taxes collected for the program aren't enough to cover the benefits paid to retirees. To fill the gap and keep payments to retirees going, the program is drawing from the trust funds (first using the interest paid on the bonds in the fund and then the principal), and then the Treasury Department is borrowing money to pay back the trust funds.
More worrisome is the fact that if nothing were to change, the Social Security retirement trust fund would be exhausted by 2034, one year sooner than projected last year, and the first part of Social Security to hit the wall would be the disability fund in 2016. Check your calendar, folks; that's next year!
Social Security benefits hinge on what's available in the trust funds.
Without a positive balance in the trust funds, the program wouldn't be able to pay full benefits. It would be able to pay only what it collects in taxes, which would require a cut in benefits across the board. That concretely could be a 19 percent cut for beneficiaries on disability starting next year and a 25 percent cut for retirees starting in 2034.
When the report came out, my colleague Jason Fichtner — a former Social Security Administration commissioner — summed up the consequences that kicking the can down the road (i.e., doing nothing) would have. He said: "Misunderstanding the critical state of the program's financial health would lead to grave consequences for beneficiaries of both the disability and retirement programs. We need to act now to reform Social Security. Delaying will only make necessary reforms more severe for those that can least afford it."
But these cuts could occur a bit sooner if some politicians get their preferred solution to the impending emptying of the Social Security disability trust fund: shifting payroll tax funds from the retirement fund to the disability fund. And this is all assuming there aren't any financial crises or major recessions between now and then. Making the retirement program more generous, without big attendant increases to its funding source (the payroll tax), would hasten its bankruptcy substantially, too.
Social Security is in the metaphorical hole. The great news is that lawmakers could stop digging by choosing from many policy options available to them: private accounts, privatization with a safety net for the poor or an eligibility age adjustment. Raising benefits, however, isn't one of them.