It's A Valid Policy Choice And We've Already Made It

     Charles Blahous, a Republican member of the pro forma Board of Trustees of Social Security, is out with a gloom and doom commentary. Here are some excerpts:

Social Security’s future, at least in the form it has existed dating back to FDR, is now greatly imperiled. The last few years of legislative neglect -- due to a failure of national policy leadership coming just as the baby boomers have begun to retire -- have drastically harmed the program’s future financial prospects. Individuals now planning their financial futures, whether as taxpayers or as beneficiaries, should be pricing in a substantial risk that the federal government will not be able to maintain Social Security as a self-financing, stand-alone program over the long term. If Social Security financing corrections are not enacted in 2013, or at the very latest by 2015, it becomes fairly likely that they will not be enacted at all. ...

A solution enacted today would require left and right to cede roughly twice as much ground as they did in the 1983 reforms, or one side must cede still more. Each year that passes, influential players must retreat still further from their preferred policies. At some point (which we may well be past already), one side, the other, or both will reach the limit of how much they are willing to swallow. ...

As another illustration of the growing difficulty of solution, let’s look at the competing approaches of containing cost growth and raising taxes. One longstanding proposal has been to slow future benefit growth to the rate of price inflation for high earners, while allowing low-income earners the higher growth rate of wage inflation, and leaving previous beneficiaries unaffected. But already now, even if we slowed everyone’s benefit growth – from the poorest to the richest – to price inflation, we could no longer maintain solvency while holding harmless those over the age of 55. ...

Advocates on the left sometimes argue to increase the amount of Social Security wages subject to the payroll tax. The most extreme version of this proposal would be to raise the amount of wages subject to the full 12.4% payroll tax -- $110,100 today – up to infinity. Yet even this drastic measure would now fail to keep Social Security in long-term balance as well. ...

If a financing solution cannot be reached, then Social Security’s self-financing construct would need to be abandoned. Assuming the program continues to pay benefits, it would have to permanently rely on subsidies from the general fund as Medicare now does. This would be a valid policy choice, but it carries unavoidable consequences. It would mean an end to one of the program’s foundational principles: the requirement that Social Security pay its own way through a separate trust fund. It would also mean an end to FDR’s conception of an “earned benefit” program in which workers were seen to have paid for their own benefits.

      Even though I think that Blahous is mostly expressing the traditional Republican wishful thinking that Social Security will eventually fail, I agree with him on most of what he has to say.  It would have been better if Social Security had continued to be funded by payroll taxes. I would prefer that additional layer of protection even though I don't think it's crucial.

     Blahous does not give any data to support his proposition that removing the cap on earnings will not close the long term gap. I have seen no study supporting this proposition. If true, it is probably only true in the sense that recent economic difficulties mean that removing the cap would only solve the problem for, let's say, 65 years instead of 75 years. The Office of Chief Actuary is good but the validity of projections that far out is limited since they are based in good part on guesswork about how the economy will go over long periods of time.

     My real disagreement with Blahous is that he is ignoring the fact that general revenue funding of Social Security, which he calls a "valid policy choice", is already a fact.  The F.I.C.A. tax has been reduced by 2% for almost two years with the difference made up out of general revenues.I see no sign that this is ever going away.
     I am reminded of the story of how Social Security's headquarters came to be in the Baltimore area rather than in Washington. A new Social Security headquarters building was under construction in Washington when World War II began. Because of the emergency, the building intended for Social Security was taken over by the War Department. Social Security was forced to stay in a temporary location in Baltimore. By the time the war was over, Social Security had become so settled in the Baltimore area that it has ended up staying for the last 67 years. With the "temporary" 2% reduction in the F.I.C.A. tax we have already moved to general revenue funding of Social Security. I don't expect that 2% to ever be restored. In fact, I expect general revenue funding to increase to make up any deficiencies in the Retirement and Survivor's trust fund. I don't like this any more than Blahous but I don't see what will keep it from happening.
     The argument that Social Security is just "welfare" grows stronger with general revenue funding but the core of the Republican party has never regarded Social Security in any other light. I don't expect that there will ever be the political will to cut benefits significantly or to restore that 2%, much less increase the F.I.C.A. tax or cut benefits significantly. Republican notions of privatizing Social Security are fantasies. We've already crossed the Rubicon with the 2% reduction in the F.I.C.A. tax. It was supposed to be temporary but it's rapidly becoming permanent. Increasing the general revenue funding is but a short additional step.

     As I have said before, the whole concept of Social Security comes from Otto von Bismarck in Germany. Social Security has survived in Germany since 1881 despite the devastating loss in World War I, the Great Depression which hit Germany as least as badly as the U.S., incredible hyperinflation, the rise of National Socialism, the devastating loss in World War II, the division of the Germany after the war, communism in the Eastern part of Germany and the eventual reunification of Germany. Yes, Germany's history, language and geography are different than ours but the two countries aren't as different as one might think. I can remember my father relating to me his experience as a G.I. in World War II. His service took him to England, France, the Netherlands and Germany. To his surprise, even though they had been his enemies and he could not speak their language, he found the Germans to be more like Americans than the people in any of the other countries he passed through. He felt more at home in Germany than in England. Social Security is just as secure in the U.S. as it has been in Germany for 131 years, regardless of the exact details of how it is financed.