I agree with Paul Krugman on this:
The bigger problem for those who want to see a crisis in Social Security’s future is this: if Social Security is just part of the federal budget, with no budget or trust fund of its own, then, well, it’s just part of the federal budget: there can’t be a Social Security crisis. All you can have is a general budget crisis. Rising Social Security benefit payments might be one reason for that crisis, but it’s hard to make the case that it will be central.
But those who insist that we face a Social Security crisis want to have it both ways. Having invoked the concept of a unified budget to reject the existence of a trust fund, they refuse to accept the implications of that unified budget going forward. Instead, having changed the rules to make the trust fund meaningless, they want to change the rules back around 15 years from now: today, when the payroll tax takes in more revenue than SS benefits, they say that’s meaningless, but when - in 2018 or later - benefits start to exceed the payroll tax, why, that’s a crisis. Huh?
The Social Security Trust fund is irrelevant; we do not have a Social Security problem, we have a general fund problem. (I also think that we should roll the payroll tax into the general income tax, while levying somewhat higher bottom rates, but that's a different rant). I also agree that it doesn't start in 2018; it starts much earlier, in the early part of the next decade, when the revenues from the payroll tax peak, and other taxes have to be raised to pick up the slack.
But I disagree about this:
Now it’s true that rising benefit costs will be a drag on the federal budget. So will rising Medicare costs. So will the ongoing drain from tax cuts. So will whatever wars we get into. I can’t find a story under which Social Security payments, as opposed to other things, become a crucial budgetary problem in 2018.
What we really have is a looming crisis in the General Fund. Social Security, with its own dedicated tax, has been run responsibly; the rest of the government has not. So why are we talking about a Social Security crisis?
We will have to find something in the neighborhood of an extra 2% of GDP to cover Social Security. That doesn't sound like much . . . but if you make $50,000 a year, that's an extra $1,000 a year in taxes. For most families I know that make that kind of money, cutting extra $1,000 a year from their budget is a pretty big deal.
Looked at in the context of the federal budget, it's an increase of about 10% of the budget to spend on one program. That, again, is kind of a lot.
I think the budget problem is ugly-but-manageable, however. The real problem is structural: Social Security discourages labor force participation among both younger workers and retirees. Every time the payroll tax gets raised, you give workers incentive to move into the informal sector. And of course, defined-benefit pensions encourage workers to retire as early as possible. Given that seniors tend to consume highly labor-intensive services, that probably means a decline in their living standards, and ours.
The other problem is precommittment--retirement programs are hard to reform on anything less than a 20-30 year time scale. So while the next administration can repeal tax cuts rapidly, whatever you do to Social Security will endure for decades. This introduces a lot of rigidity into the government.