We've heard it from all the major pols: Social Security does not contribute to the deficit. So why is it even being mentioned in grand bargain-type talks? That would be because Social Security has a deficit problem of its own, unrelated to the larger debt question.
According to the SS Trustees, Social Security will not be able to meet its obligations beyond 2033. They are already taking in less in non-interest income than they pay out. They currently make up for that shortfall by cashing in securities they invested in in time of surplus. That savings will be depleted in 2033, just about the time Gen X goes into retirement. If no modifications are made to SS's financing structure, Gen X will only see 75% of their benefits.
Here is the Trustees' report. Yes, it's based on projections, and they do revise it from time to time as warranted. The last revision bumped the depletion date up by three years. Anyhoo, the Trustees' own words:
The deficit of non-interest income relative to expenditures was about $49 billion in 2010 and $45 billion in 2011, and the Trustees project that it will average about $66 billion between 2012 and 2018 before rising steeply as the economy slows after the recovery is complete and the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers.
...The trust fund ratio, which indicates the number of years of program cost that could be financed solely with current trust fund reserves, peaked in 2008, declined through 2011, and is expected to decline further in future years. After 2020, Treasury will redeem trust fund assets in amounts that exceed interest earnings until exhaustion of trust fund reserves in 2033, three years earlier than projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2086.
Okay, so Social Security has funding problems, but why look at it now? The shortfall is a long way off and we have all these other issues to address. Fair enough, but Social Security will be modified in some way at some point. How far down the road do we kick this
Do we take our chances on 2014 and hope Dems retake the House? Would we be guaranteed to hold the Senate? Do we kick it to 2016 on the hope that we retain and/or expand power? Is it better to revise SS with Dems in control of the White House and Senate, or do we wait and hope the GOP doesn't get back in power? We see how well that wishful thinking has worked out for Boehner, who kicked the sequester can this far because he was just certain they'd have a GOP President right now.
It's pretty much guaranteed that SS will be modified and equally guaranteed that nobody will like GOP ideas for "fixing" Social Security. As long as SS's budget can be put under a microscope to determine it has a long-term funding problem, it will not be safe. By taking action to fix it now, we buy a few more decades at least (the last time anything major happened to it was under Reagan). As long as SS demonstrates solvency going forward, there truly would be no reason to consider it in future budget deals.
That is all a huge part of why it's even being discussed now. I am also of the opinion that Obama is being conciliatory on chained CPI as part of his negotiations for stimulus funding and UI extension. Again, something has to be done to fix SS; if Obama can find a reasonable fix now to get the GOP off SS's back, and it gets us something from Boehner in return, I'd call that good.
We can discuss what a "reasonable" fix would look like 'til the cows come home, but here's the thing: population dynamics have us by the short and curlies here. The Baby Boomer cohort is moving into retirement now. It numbers roughly 79 million people. Generation X is some 25 million fewer. That 2033 depletion date is right at the dawn of Gen Xers moving into retirement.
So, per the Trustees' projections, Gen X has not put enough into the SS pot to cover itself. Can the Millennials save us? Not likely, since they are already working and paying into SS right now and the projected shortfalls remain. And while it's true their cohort rivals the Boomers' in size, Millennials are not having so many children. Birth rates took a nosedive during the Great Recession here. Essentially, the Millennials would have to fund themselves as well as make up for the shortfall facing Gen X.
Any solution for fixing Social Security has to take these demographic trends into account. So, I guess this makes open immigration the best policy for both the immigrant community and Social Security. hahaha But seriously, let's take a look at some solutions being proffered:
Raise the minimum wage: Hell, let's do that anyway. But in the face of the population dynamics above, higher wages will only get us so far. And what of salaried employees; does raising the minimum wage affect their FICA contributions? How much of a bump-up would there need to be to close the Trustees' $66 billion-gap over the next five years? And remember: payroll taxes are a regressive model to begin with.
Raise the income cap/count investment income: All well and good, but this also means higher payouts, as benefits are a function of what you pay into the system. True, it's not a dollar-for-dollar increase in the payout, but the question then becomes does raising the cap net enough revenue to cover both the increased payouts and the funding shortfall? What is the magic income cap that would make that work? Ugh...math.
Changing the payout formula: This one could be fun and would make raising the cap a lot more feasible. People would only get a 10% payout on investment income subjected to FICA taxes or something, further limit the payout above certain thresholds, etc. Too bad it hasn't a snowball's chance in hell of passing.
This is where Realpolitik rears its brutal, ugly head. Forget about Social Security being left alone; that is just not going to happen. So given that and the fact that we have no guarantee Dems will remain in power four years out, it really is best to fix Social Security now instead of possibly leaving it to some future GOP administration. The best we can hope for is waiting until 2014 to see if we take back the House, but again; that's taking the gamble that we hold the Senate as well.
And so we are left with what we can get past the GOP House and Senate delegations. That is why Chained CPI is part of the discussion now; it's about the only SS fix that could actually happen in the current political climate. It could easily be structured to supplement incomes for those over 80, for whom medical expenses do nothing but rise with time, and the poorest of the elderly.
This is not to say "yay! chained CPI!" But as SS fixes that actually stand a chance of passing go, it really isn't the most horrible, terrible, no-good idea to ever come out of Washington. And if it mollifies Boehner et al enough to get us over this cliff with UI intact and money for an infrastructure bank (jobs! which help fix SS!), that is a not-insignificant victory.