I know that President Trump has said he won’t touch Social Security and Medicare. But as more and more observers start to realize that our debt trajectory could/will become a bigger problem than it is now, there may be a political advantage in reforming the program and start reforming it now.
It has been said before, but it is worth repeating: When Trump says he won’t touch Social Security, it doesn’t mean what most people understand it to mean. For instance, it doesn’t mean that benefits can continue as scheduled with the payroll tax at its current level.
If Congress doesn’t touch Social Security before its trust fund expires in 2033, benefits will automatically be cut by 21 percent. When the Social Security trust fund expires and there are no more assets to fill the gap between payroll-tax receipts and the benefits being paid out each year — and not since 2010 has enough tax been collected to cover Social Security — the program will revert to a pay-as-you-go system. That means that Social Security will only be allowed to pay those benefits covered by collected payroll taxes and other receipts, hence the cut in benefits.
While this won’t be a big deal for many seniors (seniors are overrepresented in the top income quintile), it will be a big deal for those seniors who entirely or mostly depend on Social Security benefits.
The only thing stopping the outcome is Congress changing the law. That’s called reform. There are three ways Congress could go about it: 1) maintain all the benefits paid for with debt; 2) maintain all benefits paid for with tax increases; 3) cut some benefits and increase some taxes; and 4) all spending-based reform.
Unfortunately, when Trump says he won’t touch Social Security, he creates incentives for congressional Republicans not to talk or think about Social Security reform. That’s unfortunate, because the longer they wait to rally behind a plan, the more likely it is that Democrats will get their way — and their way is option one, two, or a mix of the two.
Republicans must recognize the urgent need for reforming Social Security, if for no other reason than self-preservation. Doing nothing will lead either to benefit cuts or to the Democrats’ favorite options.
But there is another benefit that is overlooked.
The Congressional Budget Office is well known for projecting the future path of the ratio of debt to GDP based on a scorekeeping baseline that reflects current law in many respects. But there are exceptions, which include what happens when trust funds such as Social Security and Medicare’s run out. In those instances, the CBO assumes general revenues (meaning debt) will be used to fill the Social Security gap, instead of showing the benefit cuts currently scheduled in the law. The Manhattan Institute’s Brian Riedl has a good piece on this issue here.
This CBO inconsistency, while problematic, offers an opportunity for Republicans. As my colleague Chuck Blahous has pointed out, while using a correct current law baseline (one that projects benefit cuts) would threaten lawmakers with a “stick” if they behave irresponsibly by bailing out Social Security and Medicare with debt, the current baseline instead offers a “carrot”: crediting legislators with deficit reduction if they simply do what they are supposed to do anyway, keep Social Security and Medicare solvent. In other words, if Republicans reform Social Security upon regaining power, the CBO would show an enormous improvement in the fiscal outlook — a potentially huge win that Republicans can use to reclaim the mantle of fiscal responsibility. The evidence, for once, will be easily seen in the numbers.
This will be all the more important if inflation is still an issue moving forward or a larger number of people are calling for austerity.