Social Security's IOU Trust Fund

Beyond solvency, Social Security suffers from many other problems, so meek tweaks, higher taxes or expanded benefits without other cuts aren't acceptable solutions.

Social Security is the largest single program in the federal budget. The retirement and disability program will cost about $950 billion this year, which is about 23 percent of the entire federal budget. Along with Medicare and Medicaid, these "entitlement" programs are already the main drivers of federal spending. Unless reined in, Social Security and its counterparts will eventually explode the federal budget. Unfortunately, few in Congress — and neither of the major-party presidential candidates — have any interest in acknowledging, let alone confronting, the problem with Social Security's insolvency.

That it's insolvent isn't debatable. Social Security faces a $10 trillion funding shortfall. Since 2010, Social Security has been running a constant cash flow deficit, meaning that the taxes collected for the program aren't enough to cover the benefits paid to beneficiaries. To fill the gap and keep the checks going out, the program has been drawing from federal trust funds. However, the government's trust funds aren't like trust funds in the real world. Trust funds in the real world contain assets; the government's trust funds basically contain IOUs. What that means in simple terms is that the government already has to go further into debt to pay Social Security's bills — and it's only going to get worse.

Even if one believes in the sanctity of the government's combined trust funds in general, Social Security's will be exhausted by 2034, thus triggering a benefit cut of roughly 25 percent. However, since President George W. Bush tried and failed to reform the program in 2005, Congress has abdicated its responsibility by simply avoiding the issue.

On the campaign trail, things are arguably worse. The two main candidates, Hillary Clinton and Donald Trump, have promised to leave Social Security untouched. When asked about what they would do about it during the debate, Trump responded: "I'm cutting taxes. We're going to grow the economy. It's going to grow at a record rate." That's all well and good, but we can't grow our way out of this mess. That's largely nonsensical.

Clinton doesn't want to cut benefits, either, but she'd actually exacerbate the problem by raising taxes on the rich while increasing benefits for lower-income Americans. Though the tax increase part of her plan might extend the life of the program, it wouldn't fix much. The Committee for a Responsible Federal Budget looked at the issue and found that some increase in revenue would occur in the short term, but a cash deficit would return within 10 years and grow over time. It concluded: "This change would close just over one-third of Social Security's structural gap by 2090. In other words, a substantial portion of the fix defers the problem, but does not fix it." And that's calculated even before she starts to spend more on Social Security.

But even that's probably too optimistic, says the American Enterprise Institute's Andrew Biggs in a recent Forbes column, because her "tax increases on the rich would boost revenues by far less than she imagines because of rarely-discussed interactions with other parts of the tax code."

Third-party candidates are only marginally better on the issue than Clinton and Trump. Gary Johnson, the Libertarian, has called Social Security a Ponzi scheme and has personally endorsed privatization. But he has also talked about means-testing benefits — curtailing the benefits of wealthy Americans — and raising the retirement age from 67 to 72. As he is on most issues, here Johnson is to the left of the Libertarian Party platform, which would "phase out the current government-sponsored Social Security system and transition to a private voluntary system."

Evan McMullin, an independent candidate, has acknowledged the problem of overspending on programs such as Social Security, but his plan is light on details. To the best of my knowledge, his reform ideas boil down to raising the retirement age and means-testing the program. Same as Johnson.

Beyond solvency, Social Security suffers from many other problems, so meek tweaks, higher taxes or expanded benefits without other cuts aren't acceptable solutions. The free market movement has provided many reform ideas over the years, from private accounts to an expansion of Roth IRAs or traditional individual retirement accounts to plain termination. Now is the time to act.