Another Warning on the Use of Debt to Address Insolvency - CATO Institute; AMAC
Social Security’s looming insolvency is causing a stir in Washington, with Congress beginning to wake up to what could happen in about six years. Of course, as everyone knows, the recent news of an accelerated insolvency date is not “news” per se, since the program’s trustees have been ringing the bell since the late 1980s. The dawning recognition, though, seems to be the realization that six years is not a very long runway to craft–and implement–a reform package that modernizes Social Security in the face of 21st-century economics and demographics.
And here lies the dilemma for Congress: what options are available to it in grappling with this vexing financial situation? CATO Institute’s Romina Boccia and Ivane Nachkebia sum this question up as: “allow automatic benefit cuts to take effect, adopt structural reforms that put Social Security on a fiscally sustainable path, or amend the law and maintain scheduled benefits through borrowing.” In a post on CATO’s website yesterday, they provide an extensive analysis of how “borrowing around” the problem could affect the U.S. economic future by introducing “a broader fiscal crisis,” given that this approach would likely increase federal debt by about 34% over a 30-year period.
The Boccia/Nachkebia post advocates structural reform of Social Security, a position shared by most thought contributors. In addition, they argue for a commission-type approach to help pave the way for bipartisan solutions (see the Social Security Report post earlier this week), citing their own survey from last year, which found that 71% of respondents support an independent commission to guide the process toward a solution.
Clarifying Social Security’s Relationship to Federal Debt
The Boccia/Nachkebia post is certainly appropriate for discouraging thoughts of taking on debt to ward off the potential benefit-cut catastrophe. Unfortunately, their commentary again raises the point that Social Security is “already contributing to federal deficits and debt” — commentary that, without historical context, casts a skewed interpretation of the program’s history. They do acknowledge the central truth about how Social Security’s revenue has been handled throughout its history, noting that surpluses in the early years were spent by the government on “other, non–Social Security purposes.”
Regrettably, stressing that Social Security is already part of the growing U.S. federal debt problem—a technically true statement—gives rise to the perception of fundamental financial mismanagement, which in turn leads to accusations of a Ponzi-scheme-type arrangement launched by well-intentioned but uninformed voices. Not to beat a well-worn argument, we offer this historical piece from the AMAC Foundation for consideration on this point.
There Is a Better Way
As the Boccia/Nachkebia post notes, “adopt(ing) structural reforms that put Social Security on a fiscally sustainable path” is an approach open to Congress. Many organizations have provided suggested structural reforms, including the Association of Mature American Citizens (AMAC). As outlined in its Social Security Guarantee proposal, AMAC believes Social Security must be preserved and modernized to serve future generations. AMAC’s position is that this can be achieved without payroll tax increases through relatively minor program modifications, including changes to the cost-of-living adjustment (COLA) process and modifications to the formulas for calculating initial benefits for higher-income beneficiaries. Changes to the age for maximizing benefits are included in AMAC’s position, along with (1) an increase in the thresholds where benefits are subject to income tax; (2) indexing of these thresholds annually to account for inflation; (3) changing the taxable maximum formula to address the unintended loss of revenue; (4) improving survivor benefits, (5) eliminating the reduction in benefits for those choosing to work before full retirement age; and (6) improving savings tools for future retirees, including a savings account that builds estate value. AMAC is resolute in its mission to preserve Social Security for current and future generations and has drawn the attention of lawmakers in D.C., meeting with many congressional offices and staff over the past decade. See AMAC’s proposal for Social Security reform here.