Marc Goldwein: Alicia Munnell is wrong: Social Security needs a quick fix
Marc Goldwein is the Senior Vice President and Senior Policy Director of the Committee for a Responsible Federal Budget. He wrote an opinion piece that appeared in MarketWatch. It is reposted here.
You may be surprised to hear we’re pleased that economist Alicia Munnell has taken issue with our recent paper, “Nine Social Security Myths You Shouldn’t Believe.” That’s because, despite her critical tone, she seems to actually agree with all nine of them in a column published by MarketWatch.
Though she complains that some are “inside baseball” or “annoying,” Munnell describes the myths as “literally correct,” “factually correct,” and “certainly correct.”
Read Alicia Munnell’s column and the CRFB paper she critiques.
Perhaps most curiously, she calls our myth that eliminating fraud, waste and abuse can save the program “a red herring and not worthy of ‘myth’ status.” I wish that were so, but sadly Donald Trump, the presumptive Republican nominee for president, has repeated this myth numerous times on the campaign trail.
Munnell’s one genuine disagreement with us — our assertion as part of one of our myths that delaying necessary changes in this critical program will only make them more painful — puts her in direct conflict with the findings of the respected and nonpartisan Congressional Budget Office (CBO) and the Social Security program’s own trustees.
Social Security is only 18 years from insolvency, at best, and the longer we wait to act, the more painful any tax or spending changes will be. By our calculations, an immediate 21% tax increase or 16% benefit cut would keep the program solvent through 2090. But it would take a 32% tax increase or 23% benefit cut if we wait until 2034 to act.
The main reason for this is that the longer we wait, the fewer workers will be available to contribute to the solution.
Munnell acknowledges that more timely reform would allow older generations to share “the burden with subsequent generations.” But she doesn’t seem to recognize that broadly sharing the burden actually shrinks it per person.
Assume, for example, that the program needed to save $50 billion through benefit reductions next year. Spreading that among all 50 million retired workers would mean a painful $1,000 per person benefit cut. But only applying the cut to the 10 million seniors who have retired in the last five years would mean a potentially devastating $5,000 per person cut. A similar situation is true on the tax side.
There is also the matter of the Social Security trust fund.
Social Security currently funds benefits partly from its trust fund reserves, which are projected to run out sometime in the early 2030s. Rather than close the gap between payroll tax revenue and Social Security costs immediately, virtually all Social Security reform plans suggest gradual changes that stretch out the withdrawal of those reserves to fund the transition to a sustainable system, accruing interest along the way.
Acting early can make a big difference in this case. For example, a 2 point tax hike enacted today would extend the program’s insolvency date almost 28 years to 2062; if we wait until 2030 to make the same change, the trust fund will become insolvent in 2039.
To be sure, many question the economic significance of the trust fund, though Munnell does not appear to. But it is the legal basis for the payment of benefits and the concept from which most reform plans are designed.
Regardless of your perspective on how we should change Social Security, there is, of course, a cost in waiting. As former CBO Director Doug Elmendorf has explained, “The longer one waits to make changes, the larger the changes need to be and the more abruptly they would need to take effect.” And as the program’s own trustees note, “larger changes would be necessary if action is deferred until the theoretical combined trust fund reserves become depleted.”
To be fair, Munnell is technically correct in some sense — the “ultimate required tax increases” or spending cuts needed to fix the system may be the same (or close) regardless of when action is taken.
The problem is that “ultimate” won’t come for a very long time — 50 to 100 years from now under most reform plans. And what happens in the interceding years is not trivial — it affects tens of millions of lives. Failure to act promptly to fix Social Security would mean larger and more abrupt changes to benefits and taxes than are currently necessary, threatening the prospects of a secure retirement for generations to come.
It’s not too late to avoid these painful adjustments and to give workers time to plan and adjust for the changes that must be made. But time is running out quickly. Our leaders in Washington need to act soon, and stop relying on myths to justify their policy proposals, or lack thereof.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the Committee.