The Financial Times, March 30, 2011
The accepted wisdom in Washington policy circles is that we have to cut Social Security if we are serious about dealing with the deficit. Before anyone rushes to shave the benefits of retirees it might be worth asking why.
By now, just about everyone has seen the charts touted by the deficit hawks showing that the cost of Social Security, Medicare, and Medicaid is projected to go through the roof in the decades ahead, while the cost of everything else is more or less under control. This looks very ominous. The neat trick is that if Social Security is pulled out from the category with Medicare and Medicaid, and instead placed in the category with everything else, the chart looks almost exactly the same.
The real story is that the cost of Medicare and Medicaid are projected to go through the roof because the cost of health care is projected to go through the roof. We can put in any program – veterans benefits, Head Start, foreign aid – together with Medicare and Medicaid and show the cost of these three programs together going through the roof.
Lumping in Social Security with Medicare and Medicaid conceals the reality that the real long-term budget problem is a health care cost problem. The United States already pays more than twice as much per person for its health care as other wealthy countries. It gets little obvious benefit for this additional expense. Per person health care costs in the United States are projected to rise even further relative to both GDP and costs in other countries.
If these cost projections prove accurate, then it will have a devastating impact on the U.S. economy. Part of this story will be the huge deficits touted by the budget hawks since more than half of national health care spending is paid through the public sector. However this trajectory for health care costs will also have a devastating impact on the private sector as well. The cost of health care for workers was one of the big factors in the bankruptcy of General Motors and Chrysler two years ago. If health care costs continue to soar, then the burden it imposes on employers and workers will rise correspondingly.
No one disputes these facts. The basic arithmetic would seem to demand an all out effort to control health care costs; why does Social Security get dragged into the picture?
It’s hard to argue that Social Security benefits are too generous, or that retirees enjoy extravagant lifestyles. The average Social Security benefit is just over $1,100 a month. The median income for a household headed by someone over the age of 65 in 2009 was $31,400. And the vast majority of Social Security benefits go to those who need them most. More than 75 percent of benefits go to individuals with non-Social Security income of less than $20,000 a year and more than 90 percent of benefits go to individuals with non-Social Security income of less than $40,000 a year.
Moreover, benefits in the United States are relatively stingy by international standards. We have already raised the age to receive full benefits to 66 with a further rise to 67 scheduled in the next decade. The private pension system has largely collapsed and the current group of near retirees saw much of their home equity disappear with the collapse of the housing bubble. As a result the situation of retirees is likely to be worse in the near future, especially after taking into account the growing burden of out-of-pocket health care expenses projected in the decades ahead.
This is the reality for the overwhelming majority of retired workers. The story told by the deficit hawks of the affluent elderly banking their big Social Security checks is a complete fabrication. It would make little difference in the program’s financing if we could zero out the benefits to the genuinely wealthy among the elderly. In fact, the cost of administering some sort of means test would likely exceed the potential savings, unless the purpose of the means test was to hit people that would fit anyone’s definition of middle class.
It is also worth remembering that the program pays for itself now and is projected to do so for the next 26 years. While it does face a projected shortfall in later years in the century, the deficit over the program’s 75-year planning horizon is still just 0.6 percent of GDP. This is approximately one-third of the increase in annual defense spending between 2000 and the present. Unless the intention is to use tax dollars raised through a designated Social Security tax, which is very regressive, for other purposes, this is the limit of the potential savings from Social Security cuts.
The undisputed facts around Social Security make the drive to cut benefits look like a policy without a purpose. Unfortunately, swearing support for such cuts now appears to be the price of admission to serious policy debates in Washington.