December 20, 2014

A False Choice On Social Security And The Tax Cut

Social Security is certain to get much attention in the fall campaigns. What's less certain is whether the attention will focus on genuine reform. The publicity being given a recent Center on Budget and Policy Priorities study is not encouraging. According to the study, the long-term cost of the Bush tax cut is twice as great as Social Security's long-term deficit. Many defenders of the status quo take this to mean that all we need to do to fix Social Security is to scale back the tax cut.

Whether or not you think the tax cut was good policy -- Concord strongly opposed it -- this argument doesn't hold water. It understates the size of Social Security's deficit, ignores fiscal reality, and evades real choices. Scaling back the tax cut, whatever the other merits, cannot substitute for programmatic reform.

No Practical Significance

According to the Center, Social Security's financing gap totals 0.7 percent of GDP over the next seventy-five years. If extended beyond its scheduled expiration in 2010, the Bush tax cut would, it calculates, reduce federal revenues by 1.7 percent of GDP over the same period. The foregone revenue would thus be sufficient to “save” Social Security twice over.

This comparison is of no practical significance. The 0.7 percent of GDP figure refers to Social Security's actuarial balance. This measure offsets near-term trust-fund surpluses against widening long-term deficits, as if the surpluses were genuinely saved. They aren't. Every nonpartisan authority from the CBO to the GAO concurs that the trust funds are a mere accounting device.

What matters is Social Security's cash balance -- that is, the annual difference between outlays and tax revenues. SSA projects that in 2033 and every year thereafter Social Security will be running a cash deficit of 1.7 percent of GDP or higher. In other words, the Social Security deficit will be larger than the tax cut.

The Center's comparison, moreover, assumes that taxes not cut today will pay for Social Security benefits tomorrow. Unfortunately, there is no reason to believe that Congress will be any more successful at saving Social Security's new money than it has been at saving the existing trust fund. As budget developments of the past year amply demonstrate, Congress' “lockbox” promises in no way guarantee prudent fiscal behavior.

More fundamentally, no seventy-five-year current-law projection of general revenues can be taken seriously. For Social Security, seventy-five-year projections make sense because the program is based on promises spanning generations. General revenues are different. From Truman to Kennedy to Reagan, tax cuts have come and gone as short-term political priorities -- and the fiscal environment -- have changed. Yes, the Bush tax cut will make it harder to prepare for the age wave, which is why Concord opposed it. But let's not exaggerate: It is doubtful that it will still be limiting Congress' options in the 2020s, much less the 2070s.

A False Choice

Let us repeat: A higher tax level today will in and of itself do nothing to help Social Security. To help, there must be some mechanism to ensure that the extra revenue is translated into tomorrow's benefits. Apparently, the Center favors lockboxing the money. The problem is that no one knows how to build a lockbox that works. And even if we did, it would push Social Security in a dangerous direction -- toward general revenue financing.

Although the Social Security trust funds do not effect real savings, they do serve a useful function. By limiting outlays to dedicated revenues, they provide a backstop against runaway spending. General revenue financing dismantles this backstop. It also does nothing to address Social Security's deeper problems. Today's system discourages thrift, pays workers a poor return on contributions, and -- despite its vast cost -- does a mediocre job of protecting against poverty-ridden old age.

The tax-cut argument ignores all of this. Defenders of the status quo pose a false choice to the American public when they imply that all that's needed to fix Social Security is an open pipeline to Treasury.

FACING FACTS AUTHORS: Neil Howe and Richard Jackson CONCORD COALITION EXECUTIVE DIRECTOR: Robert Bixby