The newly released Social Security Trustees Report confirms yet again that the program is in big financial trouble and highlights the need to focus on solvency first. According to the trustees, the combined Social Security trust funds are projected to be insolvent by 2034 — when today’s 49 year-olds reach the normal retirement age and today’s youngest retirees turn 80.
At that point all beneficiaries — regardless of age or income — will face a 21 percent, across-the-board cut in benefits. For a typical newly-retired couple in 2033, this would mean a $10,300 immediate cut in annual benefits the following year. The program faces a 75-year shortfall of 2.66 percent of payroll, which will grow to 4.35 percent of payroll (equivalent of $3.9 trillion over the next decade) by the end of the 75-year projection window. The 75-year shortfall is the equivalent of $11.4 trillion in net present value.
Given this large shortfall, what policymakers should focus on is solvency first. But unfortunately, the recent conversation about how to fix Social Security’s long-term finances has been replaced by calls from some for broad-based expansion of benefits for all retirees, even the richest seniors. Just a couple of years ago there was broad consensus about the need to take action to make Social Security financially secure. Sadly that consensus seems to have broken down.
President Barack Obama added his voice to calling for expanding Social Security benefits. “It’s time we finally made Social Security more generous and increased its benefits,” he said in a speech earlier this month. Gone are the days when the president championed correcting the way we calculate inflation by adopting a “chained CPI” — a more accurate measure of inflation for cost-of-living adjustments.
Many progressives view the president’s change of heart — from fixing the program, to ignoring it, to expanding it — as a victory. They praise Sen. Bernie Sanders idea of expanding Social Security. But that is a short-sighted and counter-productive step.
Sen. Sanders’ proposal, for example, would cost about 1.4 percent of payroll when fully phased in, which amounts to about $1.2 trillion over 10 years. For that trillion-dollar price tag, President Obama could establish his universal pre-K plan, make community college free and college debt free, double National Institutes of Health research, fully repeal the non-defense sequester after 2017, and fully fund the Highway Trust Fund.
An analysis by Third Way finds that Sanders’s proposal would spend over $40 billion per year on benefit increases for the wealthiest fifth of Americans when fully phased in by 2045. That is roughly twice what we spend right now on child nutrition programs or Temporary Assistance for Needy Families. While some might enjoy the irony of Sen. Sanders championing larger benefits for the Donald Trumps of the world, how can anyone argue that is a good use of limited resources?
The federal government already spends six dollars on seniors for every dollar we spend on children, despite the fact that our children are worse off with a poverty rate twice that of seniors. Progressive values should be about spending on the right things. That list might include investments in infrastructure, education and R&D; increasing investments in worker retraining and new ideas like wage insurance; fixing our fiscal situation to prepare for the next economic downturn; and policies to help retirement security, such as addressing our existing Social Security benefits.
But to pretend that skipping over those necessary reforms and jumping right to expansion of Social Security benefits wouldn’t affect other priorities on that list is a huge miscalculation.
The president has said we can pay for expanded benefits by increasing taxes on the wealthy. But a broad-based expansion of benefits would consume two-thirds of the revenues from eliminating the cap — leaving an increase in payroll taxes for all workers as the only option left to restore Social Security solvency and avoid benefit cuts.
The first priority should be to make Social Security solvent again.
Maya MacGuineas is president of the nonpartisan Committee for a Responsible Federal Budget and head of the Campaign to Fix the Debt. This column originally appeared in The Hill newspaper.