Social Security: the political monster that lurks in debt talks

Long a proverbial "third rail" that politicians feared to touch, Social Security has suddenly emerged as a possible part of bipartisan talks aimed at stabilizing America's public debt.

Arguably no federal program is more politically sensitive, yet finance experts say Social Security needs some restructuring to remain solvent for the long term.

In recent days, the program has appeared to shift from "off the table" to possibly on the chopping block as part of a grand bargain on federal finances.

Some political analysts are praising President Obama for expressing a willingness to think big and discuss the toughest issues – Social Security, Medicare, tax reform – as part of the bipartisan talks over conditions under which Congress would raise the debt limit to allow more federal borrowing.

But he also faces an outcry from groups seeking to defend Social Security and from liberal members of Congress, many of whom don't want to touch entitlement programs before the next election.

"I am especially disturbed that the president is considering cuts in Social Security after he campaigned against cuts in 2008," Sen. Bernie Sanders, a Vermont independent, said this week. He cited a statement that Barack Obama made on the 2008 campaign trail, pledging not to tinker with cost-of-living adjustments (COLAs) in the program.

Changing the way inflation is measured, to reduce the annual rise in senior benefits, has emerged as one of the leading ideas of budget experts on how to fix the program. But there are other options: slowly raising the eligibility age for benefits, reducing benefits for high-income retirees, and asking high-income workers to pay more into the program through the payroll tax.

Not everyone agrees on the semantics of calling the COLA change a "cut" in Social Security. Proponents cast it as a shift to a more accurate gauge of inflation – and a change that could be applied to some other federal programs to help ease future budget deficits.

But even under the current system, many seniors feel that cost-of-living adjustments haven't been keeping pace with the prices they face – including on health care expenses not covered by Medicare or Medicaid.

The uproar over the issue is a reminder of what a political monster entitlement reform is for politicians. There's much to lose from talking about changes that often amount to tax hikes or reductions in benefits.

At the same time, there's also a scenario in which politicians could gain in public esteem, if a grand bargain for reform is well-crafted, carefully sold to the public, and draws enough bipartisan support that members of both political parties leap over the coals of controversy together.

The world didn't come to an end – nor did the Democratic or Republican Party – in the early 1980s when President Reagan and House Speaker Tip O'Neill struck a bargain to mend Social Security's finances.

Polls show that voters, while not plugged into all the details of government finance, are aware that there aren't easy and cost-free fixes for the nation's fiscal challenges. Ideas like cuts in Social Security benefits or a hike in the retirement age are unpopular, though, so it's little wonder that politicians tread near this issue at their peril.

Because Social Security can also point to money from prior-year surpluses in its "trust fund," many lawmakers argue that the debate about Social Security should be kept separate from the current talks about debt ceilings and deficits.

"Social Security has not contributed one nickel to our deficit or our national debt," Senator Sanders said Thursday.

Critics of a new COLA system say it will amount to a penalty for longevity. They cite estimates from the Social Security Administration's chief actuary that a typical beneficiary would get $560 less a year at age 75 than they would under current law. By age 85 that person would get $1,000 less per year.

But the longevity issue hints at why, sooner or later, changes to the program are needed. Already, the program is at a point where its payments to beneficiaries are starting to outstrip its payroll-tax intake.

"Since Social Security was first enacted, vast changes have occurred in the economy, life expectancy, health care, [and] the physical demands of jobs," among other things, said Eugene Steuerle, an Urban Institute policy expert, at a congressional hearing Friday. "Yet we often debate Social Security as if the type of system we want in 2080 should be determined by perceptions and measures of needs of a society in 1930."

He proposes that, rather than simply view the problem as a budgetary one, Congress try strengthening the program's finances while also taking steps to improve the economy and the income security of seniors. In Mr. Steuerle's view, the steps could include:
• Restricting automatic growth in benefits for the least needy beneficiaries.
• Adjusting benefits so they encourage employment and are concentrated more in older ages.
• Reforming private pensions so they join Social Security as a solid pillar of support, "to protect the majority of workers who today end up with little in the way of private retirement benefits."