Debating just how long to wait before fixing Social Security

The trustees overseeing the finances of Social Security and Medicare issued their latest report Friday, declaring that a) the Social Security Trust Fund is expected to run out of money in 2035, the same estimate as last year; b) Medicare’s hospital trust fund is expected to run out of money in 2026, a two-year improvement over last year’s estimate; and c) the Disability Insurance Trust Fund is expected to run out of money in 2016, just as projected last year.

So, what kind of spin would you put on this news?

To the deficit hawks at the Peterson Foundation, it was a call to action:

“Today’s reports by the Social Security and Medicare trustees confirm that even as our economy is improving, we still face long-term fiscal challenges that must be addressed,” declared the foundation’s president, Michael Peterson. “The fact that Social Security and Medicare are in serious long-term jeopardy should be unacceptable to every American. How long will the trustees have to sound the alarm before Washington finally wakes up and acts?”

The Strengthen Social Security Campaign, which vigorously opposes any cuts in benefits, offered a somewhat different take:

“Today’s Social Security trustees report should give workers and their families renewed confidence,” said Nancy Altman, the co-chairwoman of the campaign. “Social Security ran a surplus last year, is on track to run one this year, and has an accumulated surplus of $2.7 trillion.... Indeed, the report makes clear that our nation, the wealthiest in the world, can afford increased Social Security benefits, as a number of senators and representatives have wisely proposed.”

What’s really going on? It’s clear that Medicare is getting healthier, boosted by lower-than-expected increases in medical costs per patient. Some of that is attributable to the 2010 Patient Protection and Affordable Care Act (a.k.a. Obamacare), which is slowly shifting the program away from an inefficient payment system that encourages providing too much care toward one that gives doctors and hospitals more incentive to keep patients healthy. But it’s also clear that the burgeoning ranks of retirees will bankrupt Medicare’s hospital trust fund before too long, even if the system manages to keep a lid on spending per beneficiary.

Happily, there is broad agreement across the political spectrum that Washington needs to do more to rein in healthcare costs. Alas, there is a sharp split between Republicans and Democrats over how to do that.

As evidenced by the comments by Peterson and Altman, the split is even more pronounced over Social Security. Altman’s focus on the growing surplus in the Social Security Trust Fund ignores the fact that, since 2010, the program has been paying more in benefits than it has been collecting in payroll taxes. The surplus exists only because the government pays the trust fund a whopping amount of interest. And because the government is running a deficit, the interest payments it makes to the trust fund are financed with borrowed money.

The negative cash flow in the program is important to some fiscal hawks but immaterial to Altman and her allies. The former see the feds borrowing money to make Social Security payments and think that’s a bad thing for the deficit. The latter argue that when the government withdraws principal or interest from the trust fund, it’s merely exchanging intergovernmental debt for publicly held debt. In other words, it’s not borrowing more, it’s just borrowing from a different source.

The latter argument only takes you so far -- Wall Street doesn’t pay attention to intergovernmental debt, but it cares about publicly held debt. Yet it’s not clear how high the government’s publicly held debt would have to be before investors started demanding higher interest rates on T-bills, starting a vicious cycle that could lead to the sort of debt trap that snared Greece.

My colleague Michael Hiltzik, who has written a book about Social Security, makes an important point in his post Friday about the trustees’ report. The trustees’ projections are based on many assumptions about what will happen to economic growth, unemployment, wages, productivity and numerous other factors over the coming decades. Those assumptions may prove to have been too conservative or pessimistic, and as the economy improves, so too could the trust fund’s fortunes.

Nevertheless, while Hiltzik urges lawmakers to take a wait-and-see approach for the next several years, I’d rather see Congress start shoring up Social Security now. Instead of addressing problems in dramatic fashion once every couple of generations, lawmakers should be willing to make small adjustments periodically as circumstances change. They aren’t, largely because the politics of Social Security are so dicey. That only compounds the problem.

The Disability Insurance Trust Fund’s dire situation may force Congress to act soon, at least on that portion of the program. But then, lawmakers may just backfill the shortfall there with the surplus in the retirement trust fund, postponing their combined depletion until 2033. That way, lawmakers could kick the can down the road a few more years -- when the future problems will be clearer but the solution may also have to be more extreme.

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