Amending Social Security: how to's surface during national debt talks

Even if Social Security ends up untouched after the current round of wrangling over federal finances, the bipartisan negotiations have put Americans on notice: Even the most sacrosanct of federal programs is coming up for review and, before long, changes.

In his recent bid for a "grand bargain" to control future federal budget deficits and the national debt, President Obama put Social Security on the table, along with just about everything else.

With many of Mr. Obama's fellow Democrats set firmly against any reduction in entitlement benefits, and most Republicans stridently opposed to the tax increases that the president sees as a vital part of such a bargain, the idea to "go big" has proved extraordinarily difficult.

Such a package would deprive each party of a key talking point for the next election – the ability to stand as the party that "won't raise taxes" or the one that "won't cut Social Security" or Medicare.

But Obama's push to consider entitlement reform reflects a reality that Americans also recognize. Social Security needs to change if it is to remain solvent for future generations. And the urgency is rising. Already the program is paying out more in benefits than it draws in revenue – a pattern with no end in sight.

The battle over Social Security is distinct: It's the most popular of federal programs and the bedrock of retirement security for the typical household.

Political third rail

For that reason, Social Security has long been viewed by politicians in both parties as the quintessential "third rail" issue, something touched only at grave political risk.

Amid Obama's efforts at attaining the grand bargain, rumors spread that Social Security might be altered by scaling back the cost of living adjustment (COLA) by which senior incomes are adjusted for inflation. That idea stirred an immediate firestorm from advocacy groups that see it as a backdoor cut in benefits.

To call such a change controversial is an understatement. Many seniors, after two years in which the COLA formula left benefits static, already worry that their incomes don't keep pace with rising prices.

The news media, meanwhile, immediately put Obama in the hot seat: He had promised in his State of the Union message not to "slash" Social Security. So was there a difference in Obama's mind between "slash" and "cut"? In a July 7 briefing, a reporter pushed at length for White House press secretary Jay Carney to clarify the possible semantic nuance.

Social Security has captured headlines lately for another reason as well: If the two sides don't reach a deal and the cap on federal borrowing is not raised, Obama raised the prospect in a July 12 statement that the government might not be able to pay out checks to beneficiaries (currently 56 million Americans) on Aug. 3.

Paying government bills would indeed become very difficult around that day, economists say. But some experts on Social Security argue that the program has ways to keep its own checks flowing. And a protracted impasse over the borrowing limit is nearly unthinkable, given the concern that a partial shut-off of government funding could push a fragile economy back into recession.

What can be done?

So, setting aside talk of unpaid checks, how much trouble is Social Security in, and what can be done to fix it?

First, the problem isn't as daunting as the challenge of rising health-care costs within Medicare and Medicaid.

The program has a "trust fund" built up during surplus years, which can allow it to pay beneficiaries in full until 2036, the annual report from program trustees reckons. Even after that, the program's expected payroll-tax revenue would allow it to pay reduced benefits.

But that doesn't mean changes aren't needed sooner.

"What does matter is that Social Security expenses are expected to rise by about 50 percent – from about 4.3 to 6.3 percentage points of GDP [gross domestic product] – from 2008 to 2030, and taxes aren't," finance expert Eugene Steuerle of the Urban Institute wrote in a recent analysis.

In that sense, America's long-term debt problem is partly rooted in Social Security. Demographics are the driving force. The wave of baby boomer retirements comes atop a larger trend of growing longevity. In 1950, there were 16 workers for every retiree claiming benefits. It's now three workers per retiree, and by 2030 the ratio is expected to be 2 to 1.

The Social Security trustees, one Democrat and one Republican, recommended in their recent report in mid-May that Congress make fixes in "a timely way so that necessary changes can be phased in gradually," to spread needed tax hikes or benefit reductions over more generations.

Possible solutions include:

•A simple hike in the payroll tax. Bumping the current tax of 12.4 percent on worker payrolls (paid half by employers, half by employees) to 14.6 percent would close the financing gap for 75 years. This isn't a favorite solution, but it puts the scale of the problem in perspective.

•Bump up the eligibility age. This could be done as a one-year bump up in both the early and normal retirement ages (now 62 and 67, respectively) with advance warning. Or the ages could rise gradually with estimates of longevity. Or both those approaches could be combined.

•Eliminate or raise the current earnings cap on the payroll tax, so that high-income workers pay more into Social Security.

•Reduce payouts to the best-off beneficiaries.

•Adjust the COLA system, using what proponents say is a more accurate measure of inflation.

Critics of a new COLA system say it amounts to a benefit cut and a penalty for longevity. They cite government estimates that a typical beneficiary would receive $560 less a year at age 75 than they would under the current system. By age 85 that person would get $1,000 less per year.

The debate over the ultimately inevitable reforms to Social Security is a microcosm of the larger contest over how to get the nation on sounder footing financially.

The stumbling block is that politicians, and the voters who elect them, have gotten in the habit of spending at one level and taxing at a lower level. For a good long while, they've gotten away with it, but now credit-rating agencies like Moody's are warning that the US Treasury's top-notch rating could face a downgrade.

"Economically it's actually really easy to figure out how to get our longer-term fiscal house in order," says Diane Lim Rogers, chief economist at the nonpartisan Concord Coalition, which promotes fiscal discipline. Moody's is "worried that politically there's no will," she says. Its "caution is more about the politics than the economics."

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