The protracted negotiations over the fiscal cliff suggest how difficult things will actually become once we begin to address the simple fact that existing entitlements cannot continue to exist in their current form.
The one significant reform that was proposed earlier by President Obama during his discussions with the Speaker involved using the chained CPI rather than the CPI-W to calculate the cost of living adjustment for future Social Security benefits. This change would reduce the rate at which benefits would increase in the future. This would not solve Social Security’s problems, but it would be a movement in the right direction. There are better options in my opinion (including progressive indexing that would retain the CPI-W for low wage workers, adopt the CPI for high wage workers, and blend the two for those who fall in the middle). But adopting the chained CPI would be more palatable than other options (e.g., raising the retirement age could have devastating consequences for African American males, who have a shorter life expectancy).
But none of this matters at this juncture, since the political response was precisely what one might have anticipated. Reportedly, Senator McConnell, at one point willing to trade higher taxes for the changes in Social Security, has now taken it off the table. Democrats rejected the proposal and the majority of the GOP caucus in the Senate supported excluding it from any deal on the fiscal cliff. The GOP may find tax increases abhorrent, but the largest entitlement programs—unlike taxes—remain politically untouchable.
The Obama administration, the House, and the Senate clearly understand (or should understand) three things: (1) the largest entitlement programs are both unsustainable and the drivers of long-term fiscal instability; (2) reform is inevitable; (3) the sooner reforms occur, the less pain will be imposed on taxpayers and beneficiaries. If they don’t understand these things, they should simply turn to the reports by the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (currently chaired by Treasure Secretary Geithner and including HHS Secretary Sebelius and Labor Secretary Solis).
From the 2012 report’s overview:
“The dollar level of the combined trust funds declines beginning in 2021 until assets are exhausted in 2033. Considered separately, the DI Trust Fund becomes exhausted in 2016 and the OASI Trust Fund becomes exhausted in 2035.”
The projected unfunded liabilities have grown considerably in the past few years:
“The open group unfunded obligation for OASDI over the 75-year period is $8.6 trillion in present value and is $2.1 trillion more than the measured level of a year ago.”
Of course, there are many options for reform identified by the Trustees, including increases in the payroll tax (from 12.4% to 15.01%), reduction in benefits “equivalent to an immediate and permanent reduction of 16.2 percent,” or a decision to draw on general revenues. This last option is not a real option given the magnitude of our deficits and debt.
Medicare, which is projected to grow from 3.7 percent GDP (2011) to 5.7 percent of GDP (2035) is even more of a challenge. According to the Trustees:
“The Medicare HI Trust Fund faces depletion earlier than the combined Social Security Trust Funds, though not as soon as the Disability Insurance Trust Fund when separately considered.”
“The drawdown of Social Security and HI trust fund reserves and the general revenue transfers into SMI will result in mounting pressure on the Federal budget. In fact, pressure is already evident. For the sixth consecutive year, the Social Security Act requires that the Trustees issue a “Medicare funding warning” because projected non-dedicated sources of revenues—primarily general revenues—are expected to continue to account for more than 45 percent of Medicare’s outlays, a threshold breached for the first time in fiscal year 2010.”
The Trustees strongly support immediate action:
“Lawmakers should not delay addressing the long-run financial challenges facing Social Security and Medicare. If they take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare. Earlier action will also help elected officials minimize adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits.”
One wishes that the Obama administration and Congress had used the self-imposed fiscal cliff as a window of opportunity to address the unsustainability of our long-term entitlements. There were some early indications that they were moving in this direction. But short-term incentives prevailed. Is anyone surprised?
In the next few days (or at most, the next few weeks), Congress will find a fix for the fiscal cliff without addressing the long-term drivers of our fiscal problems. At best, the drama of the past few weeks will be little more than a prologue to the far more significant battles in the future.