One of the most moving business stories I ever edited was a piece about money, family, and perception written by Fortune magazine’s David Whitford. The story centered on the writer’s father, who had secretly run up vast debts that only came to light after the man’s death. The heart of the story is Whitford’s account of coming to terms with the fact that his family’s financial security had been an illusion.
I thought of that story as I read about the 75th anniversary celebrations of Social Security two weeks ago. While AARP chapters were holding birthday parties around the country, the ink was still drying on Social Security’s 2010 financial report card, which struck a rather less celebratory tone. The report noted that this year, for the first time since 1983, the program would pay more in benefits than it would collect in taxes. Positive cash flow would return in 2012, but the system would sink back into the red for good starting in 2015, when it would require ever-growing cash infusions. What had been Washington’s paragon of fiscal sufficiency may start to act increasingly like another old guy living beyond his means.
Social Security advocates might reply that none of this matters. The cash-flow shortfall was anticipated, they could say, and the system can close it by drawing on its $2.5 trillion trust fund. That misses the point about the real source of Social Security’s soundness — and why 2015 is a more significant turning point than many think.
Everyone can agree that what makes Social Security appear fiscally noble is its dedicated funding — namely, the FICA payroll tax. It is earmarked for Social Security and Medicare and goes directly from your paycheck into current retirees’ Social Security checks. For the past 25 years, workers have generated more FICA revenue than needed. The surplus taxes weren’t saved: They were spent on F-18s, bureaucrats’ pensions, national parks, and all the other things American citizens want from Uncle Sam. In return the Treasury filled the Social Security trust fund with IOUs, which add up to a promise: If Social Security should ever fail to raise enough in FICA taxes to pay benefits, Congress would find a way to fill the hole.
That sounds like the picture of fiscal soundness, doesn’t it? But imagine for a moment how the system would work if it didn’t have dedicated funding, and FICA was, say, a simple payroll tax. In that case, if revenues exceed promised Social Security benefits, the surplus would go to fund other government services; if payroll tax revenues fell short of promised benefits, the government would have to raise taxes, increase borrowing or cut other services to fill the gap. In other words, there would be no practical difference at all from how the system operates today.
But FICA taxes do make a psychological difference. For the decades in which FICA tax income has exceeded benefit outgo, Social Security appeared self-supporting and fiscally secure. That in turn fed the argument that benefits ought to be exempt from the regular compromise and politicking that other government programs are subject to, even at a time of trillion-dollar deficits. AARP executive VP John Rother made that claim explicit in a 75th birthday press release last week:
Social Security hasn’t contributed a single dime to the current deficit. It is financed
separately from the rest of the federal budget with contributions Americans make
over a lifetime of hard work. Any attempts to cut Social Security
benefits to reduce a deficit it didn’t cause would undermine retirement
security and place an unfair burden on future generations.
Only one problem: Starting in 2015, Social Security will be contributing to the deficit. That’s what the FICA shortfall means. Never mind the trust fund: The IOUs in it give Social Security the right to demand to be paid, but they don't help Treasury come up with the money. Voters will increasingly be asked to choose between Social Security and Medicare benefits and other worthy government goals. As Brookings Institution economist Alice Rivlin puts it: If Congress chooses to preserve Social Security benefits, it will first have to explain why it’s more important to continue writing undiminished checks to seniors than to buy Strykers for the troops in Afghanistan, say, or fund education.
And these explanations will be demanded at a time when seniors will already be putting a huge strain on taxpayers. Spending on Medicare, Social Security and Medicaid already absorbs 70 percent of the budget. By 2050, all else equal, programs for seniors will soak up every dollar of taxes Americans pay. Barely a third of Americans now realize how large a share of total U.S. spending is devoted to seniors. That will change.
Up to now, Americans have said they’d do almost anything to avoid cutting Social Security benefits. That too can change. For a real-life example, consider how voters view state and local government workers’ pensions, now that they’ve ceased to be next decade’s actuarial problem and turned into an immediate crushing budget crisis. Resentful taxpayers now see their own teachers and firefighters not as the glue of their community but as greedy feather-bedders. It’s no great leap to imagine similar anger boiling over from younger workers towards Social Security recipients.
If that happens, FICA and the trust fund won’t be able to preserve Social Security benefits intact. Those two were always an illusion anyway, simply a brilliant way to package what is, at heart, a government transfer program. The real source of Social Security’s fiscal health is — and always has been — the willingness of American taxpayers to foot the bill. Up to now, that willingness has never been in doubt. Still, all it took for taxpayers to lose their taste for state and local pensions was for unexpected costs to start showing up in budgets. With Social Security, that process starts in 2015.
Eric Schurenberg is Editor in Chief of the CBS Interactive Business Network
Reporter: Temma Ehrenfeld