This issue of the newsletter is about cans, roads, kicking and Social Security. Specifically, it’s about how to deal with Social Security’s impending funding shortfall. Is a 20-year fix good enough? How about a 75-year fix? Or how about a fix that — according to today’s best estimates — will last forever?
A long-term fix increases the financial pain now in order to ease the strain on future generations. It’s the fix that Aesop’s ants would advocate in a debate with Aesop’s grasshopper.
In contrast, a short-term fix makes sense if you think the economists and actuaries are too pessimistic. It also can make sense if you think the distant future is so unknowable that it’s not something to base current decisions on.
I talked to people on both sides of that debate last week. Before I get to their disagreement, though, some background.
According to the latest trustees’ estimate, the Old-Age and Survivors Insurance Trust Fund will run out of money in 2033. At that point, the only money to pay benefits to retirees and their families will come from fresh payroll taxes as they are paid. Based on current tax rates, those taxes would cover only 77 percent of benefits. There is a separate trust fund for disability insurance, but the Social Security trustees don’t expect it to run dry during the system’s 75-year forecast period.
On Thursday the nonpartisan Congressional Budget Office put out its own estimates for the trust funds that are slightly more pessimistic. It expects the Old-Age and Survivors Insurance Trust Fund to run out in 2032 and the Disability Insurance Trust Fund to run out in 2052. It also predicts that even if the trust funds were pooled, they would be exhausted by 2034, at which point tax receipts would be sufficient to pay only 75 percent of scheduled benefits.
Congress won’t stand by idly as Social Security checks are slashed by 23 percent or 25 percent. So there will be a fix in the next few years. The open issues are what it will look like and how long it will be intended to last. The gap between projected revenues and expenses keeps widening as far out as the eye can see, so the size of the tax hike or benefit cut that’s needed today is bigger for a long-term fix than for a short-term fix.
Before 1965, according to a Congressional Research Service report, Social Security’s trustees made trust fund projections “into perpetuity.” The assumption was that the factors affecting benefit costs and revenues would level off after 85 or 90 years, so whatever the situation was at that time would stay unchanged from then on.
In 1965, recognizing that “in perpetuity” is a mighty long time, Social Security trustees declared that 75 years “is as long a period as can be expected to have a realistic basis for estimating purposes.” That was roughly the length of time from when someone might start paying payroll taxes until she or he stopped collecting benefits upon death — say, from age 20 to age 95.
In 1983, the main Social Security trust fund came within months of being exhausted. That year a national commission chaired by the economist Alan Greenspan presented Congress with a plan to fix Social Security’s finances, but it couldn’t reach agreement on a solution that was projected to last 75 years. Congress tried to reach the 75-year target with a schedule for raising the normal retirement age incrementally to 67 from 65, but the fix ended up not lasting for 75 years (which would have been 2058). Still, the attempt was made.
Is 75 years still the right distance down the road to kick the can? Max Richtman, the president and chief executive of the National Committee to Preserve Social Security and Medicare, told me he thinks it’s too long. “You don’t know anything that far ahead,” he said. “It’s a nice goal, but to me this isn’t the Ten Commandments.” He said he’d be happy if Congress came up with a fix that delayed the main trust fund’s exhaustion by perhaps 20 years, during which time efforts could be made to repair the system.
Laurence Kotlikoff, an economist at Boston University whom I’ve quoted frequently in this newsletter, took the opposite stance. He wrote in a recent Substack post that even 75 years isn’t long enough to look ahead. He pointed me to a table in Appendix F of the trustees’ annual report that gives the “infinite horizon” projections for the trust funds. In the 2023 appendix, the trustees said there’s a $65.9 trillion gap in today’s dollars between projected revenues and costs in perpetuity. That’s three times the size of the gap in today’s dollars when projecting ahead 75 years.
I asked Kotlikoff whether maybe infinity was a bit much to think about. Not at all, he said. Making Social Security safe for only 75 years effectively assumes that all beneficiaries will “conveniently expire” at the end of the 75th year and so won’t need checks, he said. He acknowledged that long-run forecasts are uncertain but said: “When there’s uncertainty you don’t want to have blinders. You have to be more concerned about the unknown. That’s why we buy catastrophe insurance.”
Steve Laffey, a former mayor of Cranston, R.I., who is seeking the Republican presidential nomination, and whom Kotlikoff is advising on economic matters, told me that voters he speaks with aren’t staggered by the sorts of changes to Social Security that might be needed for an “infinite-horizon” fix. (I’m not getting into the details of those fixes because this newsletter is already getting long.) “Older people nod,” Laffey said. “They know they screwed the younger generation.”
The last person I spoke with was Laura Haltzel, a senior fellow at the Century Foundation. She said that securing Social Security out to infinity is unrealistic. “There are too many factors that could change. Covid, inflation, recessions. Trying to do anything on an infinite horizon is going to overshoot the mark or undershoot the mark.” But she also disagreed with Richtman’s idea of seeking a fix that would last less than 75 years. “If you start changing what the goal is you’ll end up with something less than everyone agreed on. If you start aiming at 40 or 50 years you might get 20.”
For Congress, “keeping their eye on 75 years is good,” Haltzel said. “Whether they can reach that is a different question.”
Outlook: Nancy Vanden Houten and Oren Klachkin
Housing affordability in the United States is likely to improve, but only marginally, Nancy Vanden Houten and Oren Klachkin, who are lead U.S. economists at Oxford Economics, wrote in a client note on Friday. One factor keeping a floor under housing prices is a shortage of existing homes for sale caused by rate lock-in: People aren’t putting their homes up for sale because they know they’ll have to pay much more for a mortgage if they move to a new home. That and other factors should “continue to support the housing market and limit the downside for home prices, even as the economy is forecast to fall into a recession later this year,” Vanden Houten and Klachkin wrote.
Quote of the Day
“When the concept of pulling yourself up by your bootstraps was first advanced in 1834, it was understood as surreal, intended to be seen as an outlandish act — how could anyone pull up their boots to lift their own bodies?”
— Alissa Quart, “Bootstrapped: Liberating Ourselves From the American Dream” (2023)
Peter Coy has covered business for more than 40 years. Email him at [email protected] or follow him on Twitter. @petercoy
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