With so many unusual things happening in the 2016 presidential election campaign, it is easy to forget about the issues that might have been part of the debate but instead have been left at the side of the road.
Social Security is one obvious example. Because Donald Trump’s political base includes so many older people who rely on Social Security and Medicare, he has not followed the longstanding Republican pattern of stoking unfounded fear about “entitlements” and telling everyone that these two essential programs are doomed.
Interestingly, however, there is an odd similarity between the way Republicans typically treat Social Security and the way that Trump is now approaching—of all things—race relations. Stay with me here.
Trump is now saying that the reason that African Americans should vote for him is that their lives are completely broken. He compares black people living in American cities to refugees living in war zones, and his pitch is, “What do you have to lose?” If everything is broken, he seems to be saying, there can be no downside to electing an openly bigoted, unqualified serial liar to be president.
The Republican Party has spent the last several decades trying to convince people that Social Security (and Medicare, but I will focus only on Social Security here) is broken. The target audience is not racial but generational. “Hey, young people, Baby Boomers are stealing your payroll taxes, and Social Security will be flat broke when your time comes. Our solution is to blow up the system and let people sink or swim. But, hey, what do you have to lose?”
African Americans are fully aware that they have plenty to lose. That fact is so obvious, in fact, that no one seriously believes that Trump is addressing his remarks to black people. His recent speeches are quite obviously performance art designed to convince undecided white people that he is sympathetic to black plight. Whether or not that cynical ploy works with his real target audience, he is not fooling African Americans.
What has always surprised me, however, is that the nothing-to-lose logic has had real traction with young people when it comes to Social Security. Part of the reason, I suspect, is that Republicans have managed to convince so many millennials that the system is literally going to disappear, even though it most definitely will not do so.
Therefore, after Trump’s upcoming defeat in November, Republicans can be counted on to return to form and attack Social Security. Importantly, because even the pre-Trump Republican Party was polling terribly with younger voters, it would not be surprising to see Republicans attempt to package a proposal to repeal Social Security as part of a plan to attract younger voters.
If and when that happens, younger Americans need to understand that they, too, have a lot to lose if they allow Republicans to repeal (or even “reform”) Social Security. There are ways to improve it going forward, but even if nothing changes, having Social Security as it currently exists is better for young people than the alternatives that Republicans offer.
Higher and Lower Social Security Benefits
There is a rather tiresome annual ritual in the news media, after the trustees of the Social Security system release their yearly report on the system’s finances. That report includes forecasts for the next 75 years, and the press reports always focus on the date on which the Social Security retirement trust fund could reach a zero balance.
A report was issued in June of this year, as required by law. Because of this year’s election campaign, however, it received almost no news coverage. One reporter who did write about it parroted the conventional wisdom, saying that the “report could add a note of fiscal reality to a presidential campaign that has given scant attention to the fiscal challenges of an aging population.” In the two months since then, Social Security has been barely mentioned. That is actually a good thing.
As I have argued frequently (for example, in this column in March of this year), the focus on the date that the trust fund might be depleted is wholly misleading. The important fact is that, even if (and it is only an “if”) the trust fund ever were to reach a zero balance, the system would still be able to pay benefits from the system’s ongoing revenues.
According to the most recent trustees’ report, the system after 2034 could pay over three-fourths of the benefits that are otherwise promised under the current rules of the system. This is consistent with last year’s report, and it importantly shows exactly what younger people have to lose if they allow Social Security to be destroyed. Three-fourths is less than one, but it is much better than zero.
Part of the political problem is a matter of labeling. The level of benefits that is associated with the trust funds never reaching zero is called “full benefits,” which means that if the trust funds are eventually depleted, people will receive “reduced benefits.” That certainly does not sound good, even though we could just as easily have labeled the lower level of benefits “full benefits” and the higher level of benefits “enhanced benefits.”
In the end, it is the future path of all workers’ incomes that will determine where we will fall between the lower and higher levels of benefits. We need both higher wage growth and less inequality to make it possible for Social Security to pay higher benefits.
The Transition to Lower Benefits—If It Happens
Whenever I point out that the Social Security system is fundamentally sound, and that the worst that can happen is for benefits to be somewhat reduced, people ask me about the transition that would be involved in reducing benefits. That is a question that I have not yet addressed in any detail in my non-academic writing, so this is an opportunity to take a first crack at it.
Imagine that nothing is done to change the Social Security system for the next eighteen years, and that the trustees’ “mid-range scenario” turns out to be accurate. As we approach 2034, policy makers will be faced with the possibility of a legislative contradiction.
On one hand, the Social Security Act is written as an entitlement, guaranteeing certain amounts of benefits based on a person’s earnings history and age. On the other hand, no government program can spend money that has not been appropriated. If the trust fund were to reach the point where it had no money in it, and payroll taxes were inadequate to pay full benefits, something obviously would have to give.
The conventional wisdom is, as I described above, that benefits will have to be reduced. I should emphasize, however, that this is not a sure thing. I once spoke with an attorney who held a high-level policy position in the Social Security system, and he told me that no one is sure what would happen.
We know that there would be a court battle, because too many people would be in harm’s way. Facing the possibility of a sudden twenty or twenty-five percent drop in everyone’s retirement benefits, the courts would be filled with challenges to that outcome.
Here, I will assume that the courts would rule against the beneficiaries, both because I think that that is the right legal outcome (though certainly not the best policy) and because the story becomes more interesting as an analytical matter if benefits are in danger of being reduced.
Imagine that benefits are set to drop on, say, September 1, 2034. As that date looms, it is not just the millions of Social Security beneficiaries who must brace for a hit. After all, the whole economy could be harmed, because the people who receive retirement benefits spend nearly all of that money every month.
Therefore, it is not just retirees who will be calling for action. Everyone who sells things to retirees (retirement centers, restaurants, cruise-ship operators, and so on) will be worried, and everyone who sells things to people who sell things to retirees will be biting their fingernails, too. This is the classic “multiplier effect,” where the interconnectedness of our economic lives can cause even distantly related transactions to be affected by a seemingly isolated policy decision.
In this situation, it is nearly impossible to imagine Congress deciding to allow benefits to be reduced. The impending crisis would force Congress to find money, if for no other reason than to prevent a recession.
What would happen then? Because Congress would have to act to come up with that money, it could no longer simply allow the system to move forward without changes. It could fund the shortfall out of general revenues. It could promise to reduce benefits slowly until they are at a long-run sustainable level, or it could increase future taxes and dedicate the revenues to cover the payment of full benefits in the meantime. It could also reduce other spending in the future and redirect it to Social Security.
Of course, Congress could do all of that before 2034. Indeed, the deficit hawks who point with alarm to Social Security’s potential future shortfall are constantly saying that we would be better off beginning this transition now, rather than waiting. Those hawks always seem to call for immediate benefit reductions rather than revenue increases to prevent future benefit reductions, but that is a matter of their own political preferences, not economic analysis.
Political inertia is the most obvious reason that these difficult choices would not be made sooner rather than later. Even so, some of us think that the better path is simply to wait and see whether the trustees’ forecasts will even turn out to be correct about the trust fund reaching zero. If so, then it will still be possible to make long-term adjustments to the system to put it in balance.
If the trust fund never reaches zero, however, then we would have avoided an unnecessary political brawl over Social Security, and the system will continue paying full benefits going forward. Once again this year, one of the Social Security trustees’ three long-term forecast scenarios (involving good, but not rosy, predictions of future economic variables) still shows that this is an entirely plausible outcome.
An Even Better Possibility: Expand Social Security
One other good possibility also exists. Hillary Clinton has embraced a proposal by Senator Elizabeth Warren to change the Social Security system immediately, enhancing benefits above the current statutory levels. In other words, “full benefits” are not some God-given maximum amount. Congress and the president could act to increase them.
The most obvious reason to increase benefits is that most people are no longer able to save enough money on their own to supplement their future income from Social Security, and they do not work for companies with traditional pension plans. Social Security will, for most people, be their sole source of support in retirement.
Under the current system, a currently young person who retires in the late 2050s after reaching an inflation-adjusted salary of $60,000 per year will be eligible for about $2,100 in full benefits. Even if that number were to be reduced because the trust fund reached a zero balance, she would receive monthly benefits in excess of $1,500.
That is not bad, and it certainly will allow Social Security to continue to keep almost all older Americans out of poverty. But Clinton, Warren, and others think that we can do better. As part of their plan, they would first address the possibility of a shortfall under current benefit levels, and then they would fully fund an increase in benefits.
Of course, all of that will be much easier to pull off if the economy is producing good jobs with rising incomes for everyone. This is why adopting progressive economic policies today matters so much to the lives of young people. Not only will their own job and income prospects improve while they are young, but their retirements will be truly secured.
Young people, then, truly have something to lose from how Social Security is handled. They should not allow themselves to be convinced that the system is bankrupt, or that we should preemptively reduce their future benefits simply because we might need to reduce benefits later.
All of which means that, if the Social Security debate re-emerges after the November elections, young people should say in no uncertain terms that they understand that Social Security is already a good deal, but that they want it to be made even better. Otherwise, we all have a lot to lose.