The next president can duck Social Security reform

Schlesinger and Murray have a pre-debate overview of economic issues in today’s Wall Street Journal. All in all, it is not bad.

But I do object to their characterization of Social Security. They note that the first of the baby boomers will reach Social Security’s early retirement age of 62 in 2008 (true) and b) there is not enough money in the Social Security system to pay full benefits for those who will retire over the coming decades ( true only if the 2040s count as a coming decade). The unstated implication is that Social Security won’t be able to cover the benefits of those just about to retire. That is false. Social Security is projected to cover all benefits til 2042 -- or until the 62 year old retiring early in 2008 is 96. After that it is forecast to have revenues sufficient to cover around 75% of forecast benefits without any reforms.

People my age should be a bit more worried -- I’ll hit 67 in 2037, and after 2042, identified revenues are only expected to be sufficient to cover 75% of expected benefits. Still, I would argue that the next President should focus on lots of things other than a forecast 1% of GDP deficit in the Social Security system after 2042, for example, the roughly 4% of GDP deficit in the rest of the government’s CURRENT budget -- a deficit that would be closer to 5% of GDP but for the funds the rest of the government is currently borrowing from social security. We will run out of money to do all the things the federal government currently does well before Social Security faces trouble.

I don’t want to imply that financing future retirement benefits is not a problem. The share of federal spending going to Social Security is sure to go up over time, as Pete Peterson and others like to emphasize. But that, in a sense, is fair. Social Security has been financing the rest of the goverment since the mid-80s reform. The rest of the government will have to pay Social Security back. Interest on the Social Security system’s government bonds will be paid out of other federal revenue sources, allowing Social Security to pay benefits in excess of Social Security taxes for a while. Nothing surprising there. Borrowed money has to be repaid with interest. My problem with the emphasis usually placed on Social Security reform is that it detracts attention from the much bigger (4% of GDP v. 1% of GDP) and much more immediate (2005 v. 2042) problem with the rest of the federal goverment’s finances. The Social Security system is taking in more money that it pays out in benefits, and will do so for several more years. The same most certainly can not be said for the rest of the government.