Monday, March 7, 2011

A Social Security Crisis?

In bewailing the "entitlements crisis," many have made much of the fact that the percentage of GDP expended on Social Security, Medicare, and Medicaid is growing at a fairly ferocious pace. In 2007, those three programs totaled 8.4% of the GDP. By 2050, the CBO estimates they could be 18.6% of GDP. By 2080, they could be nearing 25% of GDP. The current federal budget as a whole is 25% of GDP, and that recently spiked (it was under or around 20% for most of the past 15 years). So, if current trends do not change (a colossal if), federal spending on just three programs would be as big as a proportion of the economy as the whole federal budget is now. Those numbers would probably not be sustainable.

However, grouping those three programs together hides a significant fact: the driving force behind the inflation of those "entitlement" programs is the increase in medical spending. Social Security spending is far more sustainable than the current Medicare and Medicaid regimes.

Currently, Social Security spending is about 4.8% of the GDP. This spending is estimated to rise to about 6.1% of the GDP by 2035 and will linger around 6% for the next fifty years after that. This is about a 27% increase in Social Security spending as a percentage of GDP. That's not a small number, but it is a manageable one, especially when one considers that that period will witness the retirement of the Baby Boomers. If it gets its economic house in order, the US could conceivably afford to spend 6% of its GDP on Social Security for a very long time.

Moreover, due to reforms during the Reagan era, Social Security is more sustainable now than it used to be. According to the Congressional Research Service, the worker earning an average income who retired at 65 in 1980 drew out more in benefits than he had put in through taxes and accumulated interest in less than three years. An average 65-year-old retiring in 2002 would have to collect for almost 17 years for that to happen; the retirees of 2020 would have to collect for nearly 21 years to reach that point. (And, yes, I realize that those figures could also be used to argue for a kind of privatization, but let's focus on fiscal sustainability for the moment. I also realize that the federal government has borrowed against the Social Security "surplus" of past decades, and that a time will come, if it has not already come, when the federal government must pay back the billions and billions and billions it owes to the Social Security system.)

If there is an eventual crisis for Social Security (the status of SS crises depend upon assumptions about rates of economic growth, employment, and other factors, leading to various projections), the solutions to make Social Security more sustainable seem relatively clear cut. Raising the cap on incomes taxed for Social Security (the current max is around $106,000) and slightly changing the retirement age---to suggest two obvious choices---could extend Social Security's sustainability for a long time.

It may be Pollyannaish to suggest that a few minor changes could indefinitely protect Social Security, but it is realistic to say that those changes are minor compared to the ones needed for Medicare and Medicaid. That's where the real growth in spending is. Health-care spending has long exceeded the rate of inflation, and, with an aging population, that spending is only increasing at a faster rate.

For Medicare and Medicaid, the options are a lot harder. Because Social Security works on a fixed-benefit model, the costs are easier to project and, if needed, easier to curb. Federal health expenditures have long operated upon a blank check model, and there seems to be considerable waste in federal health-care spending. But finding strategies to identify that waste and cut it is a much more challenging proposition. I think effective savings can be found, but achieving them will acquire bureaucratic know-how and determination.

Some Republicans may find themselves in a hard place in terms of dealing with Medicare/Medicaid spending. Barack Obama's proposals to cut the rate of growth of Medicare spending were met with cries of "death panels." Over the past few years, many Republicans allied themselves with protecting Medicare funding. Yet now Republicans want to talk about seriously cutting the deficit, and photo-op cuts to the "discretionary" side would offer marginally cosmetic changes to the budget at best. (None of this is to suggest that I find the supposed "savings" of Obamacare particularly persuasive.)

There may be something to be said for various Social Security reforms. But Social Security does not seem to be ground zero for the government's fiscal crisis; the fiscal necessities for reform there are far less pressing than those for other parts of the federal budget.

Two points in closing:

The first is electoral. Social Security is one of the most popular government programs. According to a recent Wall Street Journal poll, 77% of Americans find cutting Social Security to be unacceptable. Kicking grandma off of Social Security while also advocating for ever-expanding tax cuts for the wealthiest Americans (who have been the real economic winners of the past decade) is the electoral equivalent of running into machine-gun fire.

The second is more principled. From a small-government perspective (or at least from my perspective), Social Security is far from the most invasive program or the force that most undermines the sustainability of our nation as a free-market economy. If conservatives do want to advance the cause of a smaller government, there are, I think, much bigger and more pressing fish to fry. Reckless financialization, the hollowing out of the middle class, government distortions of the market through cronyish favoritism, the decay of the family---all these things are much more dangerous to the future of individual liberty vis-a-vis the government than Social Security.

(Crossposted at Frum Forum)

1 comment:

  1. "If conservatives do want to advance the cause of a smaller government, there are, I think, much bigger and more pressing fish to fry." Where did that come from? How on earth can you think that conservatives want smaller or less invasive government? Have you no memory? I agree that Obama's imprisonment of people without charging them with a crime or giving them a trial so they have a chance to argue their side is despicable, but he's just continuing and legitimizing Geroge W Bush's policies. Same with unauthorized wiretaps, the FBI being able to chack on your library borrowings without oversight, the fact that the government is reading all your emails. It's funny, I never hear conservatives complaining about these things. Has any Tea Party group to your knowledge objected to any provision in the Patriot Act? I've never heard of it. Maybe I'm just a victim of epistemic closure, because I usually read what I consider centrist sources, which the conservatives nowadays call the extreme left.