Should Social Security Be Fixed Forever?

The Bigger Story

In his New York Times article on Social Security, Peter Coy asks the question of whether Social Security can or should be fixed forever, given the difficulty of estimating costs over an uncertain long-term future. I think the wording of that question only confuses the debate.

Since its inception in the late 1930s, Social Security has always been fixed to benefit and tax all future generations. Several reforms to Social Security’s initial provisions have scheduled it forever to absorb ever larger shares of our national income and revenues, usurping most other priorities. So, the eternal “fix is in,” so to speak, regardless of whether new legislation makes adjustments.

If the long run doesn’t matter, why don’t we similarly fix all existing spending programs to grow automatically forever, whether for children or housing or defense? After all, Congress and the president merely need to agree on a regular basis to renege even more on past promises made to the public for low taxes and high benefit growth rates.

The answer is simple. Making likely unsustainable promises in any program is a recipe for potential fiscal disaster, Congressional stalemate, and an inflexible government unresponsive to current demands and needs. Does this situation sound familiar to anyone, whether conservative or liberal, who looks at today’s federal budget?  The unsustainable growth rates in Social Security and most of government healthcare already play a huge role in the scheduled rise in our national debt relative to our national income and the decline in share of budgetary resources devoted to working families. Even within Social Security itself, Congress has scheduled a continual reduction in the share of total benefits devoted to the poorer and older of the old.

Advocates for forever growth along its rigid current path argue that the future is uncertain. Why, therefore, they assert, try estimate the long-term costs of the program, much less try to reform it for more than a short period?

Again, this is the wrong question. The question should be to what extent the government should be making eternal promises, especially ones it likely can’t keep. It’s the eternal promise, made in the midst of uncertainty, that creates the requirement for an eternal estimate, not the other way around. Larry Kotlikoff, who has long stressed estimating what would have to be set aside to meet future promises (and is quoted in the Peter Coy article), is correct. You don’t have to agree fully with his calculations or those of the Social Security actuaries, who now attempt similar estimates.

Suppose a young couple sets up a trust requiring annual payments over the entire lives of their existing and future children and grandchildren. That’s a period that could easily last 125 years. No trust lawyers are going to allow the trust document to promise payments that can’t be made, but, even if they would, the couple’s financial advisers and actuaries would estimate what will occur over those 125 or more years. It’s not that their projections will be spot on given uncertainty over matters like future returns on investment and number of heirs. The projections will show the implications of any promises in the trust and what features need to be adjusted to make the trust most likely to be viable even in the midst of that uncertainty.

Interestingly, advocates who oppose long-term estimation and long-term fixes essentially do support long-term legislative fixes—those made 40, 50 or more years ago, based on what inevitably had to be an incomplete understanding of today’s economy and citizens’ needs.

That raises a different question. Why do some advocates find some past eternal and almost certainly unsustainable fixes OK but a new, hopefully sustainable, one not so?  Basically, these opponents of long-term fixes to Social Security favor tax increases over reductions in benefit growth rates. After all, short-run fixes in Social Security, given its growing annual excess of benefits over revenues, would leave in place significant imbalances after each short-run period ends. At that point, existing retirees will have become dependent on whatever higher level of benefits have been paid out. Congress is not going to tell retirees receiving, say, $2,000 a month in benefits that they must now accept a cut to $1,600 or some other lower level. Thus, when the Social Security trust fund runs out of money at the end of each short-run period, the only short run fix is to find new revenues somewhere.

We can see how this played out with the 1983 Social Security reform, which tried to fix the system for 75 years but not indefinitely. That is, Congress deliberately left projected benefits at the end of 75 years significantly in excess of revenues. Due to overly optimistic projections, however, that 75^th year of reckoning when the trust fund had no assets and insufficient revenues to pay for existing benefits now occurs at the end of about 50 years, or in the early 2030s rather than late 2050s. It’s already so close to the day of reckoning this time around that’s almost impossible to avoid revenue increases without paring the benefits upon which those already retired depend. Opponents of long-term reform want this to happen again and again as a way to avoid much paring of the growth rate in benefits.

Partly because of that 1983 legislative failure, the Social Security actuaries now offer to legislators designing reform packages the option of bringing the 75^th year into balance. That’s a rough way of addressing long-term imbalances after 75 years have passed. There are also many ways to prepare the system to deal with many but not all sources of uncertainty, such as Swedish-type automatic adjustments when assumptions about birth rates, mortality rates, and economic growth change over time. But that’s a subject for another time.

Of course, ignoring concerns by taxpayers over rising tax rates, Congress for a long time could simply raise revenues continually to match the continual rise in benefits. But that has implications far beyond Social Security. After all, Congress should be deciding over time the best use of whatever revenues it raises. When revenue increases are automatically spent on Social Security to sustain its rising costs as a share of national income, then something has to give. For instance, Social Security law now makes another year of retirement benefits when people live longer an automatic priority over spending on education, global warming, or work subsidies.  

Despite the claim that ostriches stick their heads in the sand, they know better than to asphyxiate themselves. We should be equally wise when looking to Social Security’s future.

See related reference to my book, Dead Men Ruling, in the Washington Post editorial on fixing the federal debt, July 11, 2023