Former President George W. Bush followed up his re-election with a public relations campaign in early 2005 to reform Social Security. It did not go well, and Bush's failure — made inevitable by the mishandling of Hurricane Katrina — confirmed to Washington that Social Security was the "third rail" of politics and should never be touched.
It has lain untouched ever since, perhaps partly because Social Security is not the most pressing strain on federal finances. But it is a very serious one in the medium and long term.
Medicare and the Social Security Disability Insurance program are in far worse shape, and young people have fair warning not to rely on a Social Security check for their retirement. But the Social Security program's trustees have just reminded the nation that this problem hasn't gone away. Politicians need to take notice now, because the challenge of fixing it will only become harder to solve the longer they wait. In our families we do our best for our children; we don't just heap liabilities upon them and expect them to look after us. But politicians are doing the exact opposite.
The new report projects the same bleak future for Social Security as last year's report did. As of 2034, Social Security's trust fund, which is already full only of IOUs, will even run out of theoretical money. At that point, under current law, benefits would be scaled back to match whatever annual amount is being paid in through Social Security payroll taxes. And that amount will be significantly less than what today's taxpayers are expecting for tomorrow. Over a longer time frame of 75 years, the program is on pace to come up $12.5 trillion short of what beneficiaries expect to be paid.
The 2034 deadline might seem far away, but it isn't. The longer Congress waits to act on this, the more painful the eventual fix, or the wrenching failure will be. If Congress were to act immediately to cover the gap, it would either have to increase the rate of the regressive payroll tax by 22 percent, or reduce everyone's benefits by 17 percent. Either way, the heaviest relative burdens would fall on the poor. In the case of an employment tax hike, it would also sharply reduce low-wage employment opportunities, given that the tax makes up a larger share of the employer's labor cost.
Meanwhile, each year that passes, tax hikes or benefit cuts needed to put the program on stable long-term footing become more and more harsh.
President Trump has vowed there will be no benefit cuts. A massive tax hike seems equally unlikely. Treasury Secretary Steve Mnuchin reacted to the news with a statement implying that the answer is economic growth. Massive middle-class wage growth is needed. That would certainly increase the amount being paid into the program, but if politicians could magically cause enormous increases to the wages of everyone making less than $110,000, they would have done so already. Economies don't just steadily grow, they also experience unpredictable slowdowns and recessions. Salvation for Social Security through economic growth alone is not a realistic plan, not because growth could not be much faster but because Democrats would never let the necessary legislation pass through Congress.
Today's leaders would be doing a big favor to tomorrow's leaders, not to mention tomorrow's beneficiaries, if they worked together to reform this program, to make it a sustainable vehicle for retirement.
Ideally, they would do it in a way that would also give people more control over their retirement savings. A system of private investment accounts with a government guaranteed minimum benefit, like the system used today in Chile, would not only give beneficiaries more certainty, but it would also reduce wealth inequality by helping all families to save and accumulate wealth.
But that isn't the only way to improve Social Security's bottom line. There are many other ideas to which Democrats might prove more receptive, including the Heritage Foundation's 2011 plan of adopting a flat-rate benefit that keeps seniors out of poverty but pays out less to the wealthy.
Whatever Congress chooses, it must start discussing the problem now. People can fool themselves all they like, but given that tens of millions of people are planning to retire 17 or more years from now, any retirement program with a 17-year shelf life is headed for disaster.