Is Social Security 'Sustainable'? Kinda


Let's skip straight to the chorus of the deficit reduction song: our debt crisis is our entitlement crisis is our debt crisis. Catchy! But not easily solved. The real long term threat is Medicare spending. The ghost in that machine is rising medical costs, which will take some Herculean efforts to curb. So for now, let's talk about the other entitlement: Social Security.

Social Security isn't in terrible shape. It just needs a fix up. Yes, it's running a deficit this year, but it should be in the black for most of the decade and we've got a $2 trillion fund to wind down before the program goes officially bankrupt. Economic Policy Institute economist Monique Morrissey talked to the House committee yesterday about its sustainability:

Because of population growth, rising life expectancy does not create a Malthusian dilemma. In fact, the ratio of beneficiaries to covered workers is projected to level off after the Baby Boomer retirement.
Similarly, Social Security outlays are projected to level off--not spiral upward like health care costs.
This isn't to say that Social Security costs won't increase, but this increase is manageable--on the order of 1.5% of GDP. And because Social Security is currently running a surplus, the 75-year shortfall is much smaller--around 0.7% of GDP according to the Social Security actuaries, and even less according to the Congressional Budget Office.

It's worth pointing out that a shortfall around 0.7% of GDP is manageable, but far from a cinch. Morrissey says that raising the earnings cap to 90% of income (currently the Social Security payroll tax does not touch income above $107,000) and eliminating it altogether on the employer side would account for 70% of the shortfall.

That's good money if you can get it, but it's not easy to tell families making $251,000, "Yes, your Bush tax cuts are disappearing, and your dividend rates are going up, and yeah, you'll see Medicare tax rates creeping higher under health care reform, oh, and also, we're slapping a 6.2% tax to the last $100,000 of your income"? Social Security is sustainable, but it's sustainable provided we make some changes that will be politically difficult in an environment of rising tax burdens.

It doesn't take rocket science to solve the SS shortfall. You can raise the tax rate, raise the payroll ceiling, delay retirement, restructure benefit outlays, or means-test the pay outs. In short, you can increase the revenues, or cut the spending, or do a little of both. But the longer those trying to protect Social Security delay reform by claiming there's nothing to see here, the harder it will be to solve the problem later.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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