A Comment on Charles Blahous’ Social Security Article

Charles Blahous, who serves as a public trustee for Social Security and Medicare, wrote an article about Social Security ("Social Security's possible fate: Done in by its friends") for the Washington Post, which was posted on that newspaper's website on the evening of March 24, 2011. The article is interesting in that it does not resort to the usual argument that at some point the trust fund will have to cut benefits because of insufficient funds if nothing is done. Blahous takes a more realistic view. If nothing is done to shore up the system, around 2031, Blahous states, there will be a funding crisis. He then goes on to say: "Faced with a choice between wrenching benefit cuts and/or payroll tax increases vs. tearing down the wall between Social Security and the rest of the budget, legislators will tear it down."

Blahous argues that this would be a terrible result for the program – "the end of Social Security as we know it…No longer would benefit programs be shielded from the chopping block by the rationale that they were funded by separate payroll tax contributions. Social Security would be financed from the general revenue pool, and its benefits would thereafter have to compete with every other federal spending priority."

Of course, Blahous is right that Social Security benefits would not be suddenly cut because of a shortage of money in the trust funds. There are too many beneficiaries, who tend to vote in higher percentages than other groups, for that to happen. But his other proposition, that this would lead to "the end of Social Security as we know it," is a bit of a stretch. Social Security is currently one of the programs that is being discussed as needing fixing in order to reduce the long-term deficit. The Greenspan Commission proved that changes to the program can be made. In other words, Social Security currently competes with other spending programs. The degree to which it has been successful in this competition is due to political realities more than anything else.

Moreover, that there is a separate trust fund and a dedicated tax to fund it is a double-edged sword. Sure, it provides the argument to beneficiaries that they paid into the fund and hence their benefits should not be cut. But it also provides the argument that the benefits should be cut or payroll taxes raised because the fund is projected to run out of money. In fact, that is the argument that Blahous is making.

Part of the problem is that we do not want to admit what is going on here. Social Security is in reality a transfer program; it transfers income from the working population to retirees (and the disabled and surviving dependents). Dedicated taxes and trust funds do not change that economic reality. Before Social Security, this was effectively done privately; children would take care of their aging parents if they needed help. Chancellor Bismarck of Germany decided in the 19^th century that taking care of retirees should be socialized, and many countries, including the U.S. in the 1930s, decided to follow the German example.

In order to sell the program and to differentiate it from welfare, the program was designed with a special tax and trust fund. And from the point of view of the individual, Social Security can reasonably be viewed as a combination of a retirement savings and insurance program. But that does not change the economic reality when looking at the program as a whole, it is a transfer program.

Attempts to change Social Security dramatically, such as having it rely more on private investment accounts, have always floundered on a fundamental political reality. No generation wants to be the one that both funds an older generation's retirement and its own. On this point, while I have not been able to verify the quote, I remember reading that FDR once said that he had structured Social Security in such a way that "no damn future politician" could ever change it. And so far he has been right. The New Dealers have managed from the grave to win against proposals to alter the system fundamentally.

This is not to say that there are no demographic issues. One that will resolve itself over time is the baby boomers' retirement, already underway. The longer life expectancy of retirees and a diminished fertility rate, though, are likely to be continuing problems. There will have to be adjustments in light of this, especially if the U.S. is not more open to legal immigration than it currently is.

However, in my view, the adjustments to Social Security are nowhere near as pressing nor as fundamental than what is necessary for Medicare and health care generally. More than other countries, the administrative costs of our overly complex health care system are a burden, as anyone who has tried to figure out medical bills and health insurance reimbursements surely knows. And our aging population needs more health care. The recently passed health care legislation, now under attack, does not address the growing costs of health care to the economy as a whole nearly enough. The politics of this are discouraging, and I hope that Blahous and others devote their energies to figuring a way to come up with workable solution that can be sold in the current fractious political environment.

(Disclosure: I have met Mr. Blahous when we both served briefly on an advisory committee to a private firm, though I do not know him well.)