How to Change Social Security to Reduce Future Public Debt

by Bruce Webb

A quick hit for Super Bowl Sunday.

Certain opponents of Social Security claim their goal is ‘sustainable solvency’ which is in practice defined as reducing the flow of funds from the General Fund to Social Security over the long term. In a previous post I pointed out that straight benefit cuts do not have this effect, and rather paradoxically actually serve to increase such obligations over the long term. Which suggests that if we want to do more than shift Public Debt obligations around in time but actually seek to reduce them there is only one short term solution.

Cut FICA taxes. Give workers and their employers a mild tax break.

For example lets say we cut the current FICA tax by 0.2% of payroll and diverted 0.3% of what remained to the Disability Insurance component. The end result would be a 0.5% of payroll cut to OASI and a 0.3% boost to DI. The latter would immediately put DI very, very close to long term actuarial balance while the former would mean slowing the rate of growth of the OAS Trust Fund (which opponents believe is just a unfunded debt obligation and no asset at all). This in turn would reduce the ultimate peak point of Trust Fund balances by limiting total interest that would have accrued to the TF.

Over the short run this increases the needed draw on the General Fund in just the same way that pre-paying your mortgage does. But over the long run it saves the General Fund plenty. And the extra flow could be easily financed by a small wealth tax, or simply by tapping a little of the revenue gained from the expiring tax cuts.

If the Peter G Peterson’s of this world are REALLY believers in intergenerational equity and keeping debt on our children and grandchildren to a minimum they can do so by cutting taxes paid by workers now and doing an early repayment of the money they have been borrowing. Time for the billionaires to show whether they are seriously concerned about ‘fiscal responsibility’ or simple welshers on their debt obligations, time for them to put up or shut up. Show that they are willing to actual share in the shared sacrifice they insist that workers should take.

Cut FICA and give workers a break for once.

This is more polemic than serious policy proposal, but it works. It fixes DI and simply brings forward the trigger for the mild increases in OAS that will still be needed a decade plus out. But the overall economic and political strain created by a bigger than necessary Trust Fund would be reduced and workers would get a small but real tax cut in the interim, so really it is kind of a win/win. For everyone but the billionaires. Which is why I don’t expect it to come to pass.