03.28.11

Harry Reid's Social Security Lie

As budget wars heat up, Harry Reid, the Senate’s most powerful Democrat, held a rally telling seniors that Social Security doesn’t need fixing. But he's dead wrong, writes Mark McKinnon.

At a time when the country needs real leadership on entitlement reform, so that we don't end up like Greece or Portugal, Senate Majority Leader Harry Reid (D-NV) is playing pure politics of the worst sort. It sure looks like Reid is paying off the special interests that rescued him from the gallows in his last election. How else to explain how he could so blatantly ignore what is obvious to any objective observer? Right now, as we've been saying at No Labels, we need everything on the table and everyone at the table to have any chance to escape fiscal Armageddon, and Harry Reid is taking a walk and taking Social Security with him.

Reid hosted a “Back Off Social Security!” rally today for “retiree activists” to protest “cuts that will weaken” Social Security. Calling it “the most successful social program in the history of the world,” Reid insisted nothing needs to be done to fix Social Security right now. "Two decades from now, I'm willing to take a look at it," Reid, age 71, has said.

But the truth is out there. Charles Blahous, author and public trustee for Social Security and Medicare, has it right: “[O]ur national Social Security debate is more polarized than it needs to be... disagreements often devolve into mutually uncomprehending shouting matches.” But Blahous warns that without action, “Chances are now markedly increasing that Social Security will eventually cease to operate as the self-financed, earned-benefit system that Americans have long known it to be.”

Three Truths

1. Life expectancy has increased 15 years, but the retirement age has changed little.

When the “Old-Age, Survivors, and Disability Insurance” program was enacted in 1935, average life expectancy in America was 60 years for men, and 64 for women, with the retirement age 65. Today life expectancy is 75.7 years for men, and 80.6 years for women. But the retirement age is now just 66 or 67, depending on your year of birth. We are living much longer after retirement than the program was designed for. Good for us, but a strain on the system.

2. Those hard-earned dollars you pay into Social Security today are paid out to somebody else tomorrow.

There is no lock box. Social Security is a pay-as-you-go system: Money in, money out. It’s a pipeline with “money from current contributors coming in the front end and money to current beneficiaries paid out the back end.” This transfer of income, from one generation of workers to another, works only when there are more at the front end than the back. But there is a boom in boomers retiring and a decrease in the number of children—future workers to pay into the system—being born. Today, 100 workers support 32 beneficiaries. In 20 years, 100 workers will need to support 46 beneficiaries. There are more of us nearing retirement age, but we are not procreating enough.

It’s either smaller phased-in changes now, with protections for current retirees, or a big hurt later.

3. Social Security is short of cash.

Since 1935, the cost of benefits has been entirely covered by payroll taxes from current workers. In 2010, nearly 60 million people drew Social Security benefits. But in less than 25 years, that number will grow to 88 million, with benefit payouts doubling to over $1.4 trillion. Yet fewer people will be paying into the pipeline. We don’t need to wait 20 or 25 years to see that Social Security is nearing insolvency: The Congressional Budget Office projects payroll tax revenue will fall $45 billion short of benefits owed this year, not including the interest owed by the government to the Social Security trust fund. (Excess Social Security tax revenue in previous years was exchanged for Treasury bonds—federal government debt—on which the government now owes interest.) Although the system is expected to return to balance temporarily in 2012, it will begin running deficits again in 2015 if interest from the trust fund is excluded and in 2025 including interest payments. After that point, the trust fund will be fully exhausted in 2037. We are running out of time and money.

We faced a similar Social Security shortfall in 1983. The crisis was averted when both Democrats and Republicans agreed to mutual sacrifice under President Reagan’s leadership. But the fix was not perfect, and not permanent. Economic, demographic, and legislative changes have brought us back to the brink. With less money coming into the pipeline, and without other changes, Social Security taxes will again have to increase, or future benefits will have to decrease, and/or the federal government will have to borrow money to fund Social Security, adding to our already out-of-control national debt burden.

Five Fixes

President Obama’s bipartisan National Commission on Fiscal Responsibility and Reform offered a plan to make Social Security solvent, though only for 75 years, while still protecting current retirees. Recommendations included raising payroll taxes for the affluent and reducing future benefits, including by slowly raising the retirement age for full benefits to 69 by 2075—impacting not today’s retirees, but today’s kindergartners.

Sen. Kent Conrad (D-ND), a member of the commission, refuted Reid’s tired trope about “balancing the budget on the backs of America’s seniors,” saying: “Social Security needs to be reformed to maintain its solvency, not to reduce the deficit... Inaction here will hurt seniors—and that is unacceptable.”

And despite hysterical attacks, Rep. Paul Ryan (R-WI) also offers reasonable remedies in his RoadMap, protecting current retirees, making the program permanently solvent, and defusing the even larger Medicare and Medicaid time bombs.

From a centrist’s perspective, and from the best of these and other plans, five fixes for discussion to find a balance between raising revenue and slowing growth:

1. Recognize reality and gradually increase the retirement age by one month every two years until age 70 in 2083.

2. Gradually increase the amount of wages subject to payroll taxes (currently $106,800) over the next 38 years to reach the goal of covering 90 percent of earnings.

3. Increase the minimum benefit for full-career minimum-wage workers, adjusted proportionally for workers with less than 30 but more than 10 years of earnings.

4. Gradually move to a more progressive benefits formula with benefits for higher earners growing at a slower rate than lower wage earners, and everyone else somewhere in between.

5. Offer voluntary personal retirement accounts, like those provided members of Congress, with a guarantee on contributions, that are personally owned allowing workers to pass on accumulated wealth to descendants. Individuals can remain in the current Social Security system, or shift in or out of their accounts as their tax filing status changes.

Political demagoguery and cheap campaign tactics to scare seniors aside, the reality is frightening enough. It’s either smaller phased-in changes now, with protections for current retirees, or a big hurt later—like celebrating Harry Reid’s 97th birthday with a drastic 22 percent across-the-board cut in benefits when the Social Security Trust fund is exhausted in 2037.

As vice chairman of Hill & Knowlton and Public Strategies, and president of Maverick Media, Mark McKinnon has helped meet strategic challenges for candidates, corporations and causes, including George W. Bush, John McCain, Ann Richards, Charlie Wilson, Lance Armstrong, and Bono. McKinnon is co-founder of No Labels and co-chair of Arts & Labs.