Time to Grab the Third Rail: Address the Fiscal Problem by Social Security Reform

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The current economic question is what to do about budget deficits.   The Greek crisis has made sovereign debt a genuine concern even among advanced countries.  (I should say “especially among advanced countries,” because developing countries now have stronger fiscal positions, in a historic reversal of roles.)   At this weekend’s G-20 Summit, Germany and the UK are defending strong fiscal austerity, with language that doesn’t even allow for the idea that short-term spending might be expansionary under severe recessionary conditions such as 2008-09.   In the US, Peter Orszag is reported this week to have resigned as OMB Director, not just to get married, but supposedly in part out of frustration about the fiscal outlook and President Obama’s refusal, as part of any comprehensive deficit correction program, to reverse his campaign pledge against raising taxes on those earning less than $250,000.

American economists have no shortage of ideas for cutting the US budget deficit in the long run, in economically efficient ways.   (Among other steps: limit tax expenditures.)   There are two big obstacles. 

First, political infeasibility:  All the proposals hurt somebody, and will therefore be politically opposed.   Second, the relatively weak economy:  Even though the recession is almost certainly over, the recovery is still in its early stages.  Raising taxes or cutting spending immediately might throw us back into recession, in a replay of 1937.   But deficits can be eliminated over time.   We did it in the 1990s.

The answer is to take steps today that will reduce deficits in the future.  But it is hard to convey to the public the economics behind the St. Augustinian message “indulge today, be chaste tomorrow.”  It is harder still to gain credibility for such a pledge.   (The public can’t be both sophisticated enough to understand and naïve enough to believe.)

It is time to take on Social Security, which is projected to pay out more than it takes in this year.   Reform of Social Security has since the 1980s been known as the Third Rail of American politics: politicians are advised “touch it, and you die,” like the high-voltage third rail of electric train lines.  (The phrase was coined by Speaker Tip O’Neill.)   But everything is a third-rail issue now.   Other fiscal measures that are under discussion, such as adopting a Value Added Tax, are as unpopular.

Anybody who is serious recognizes the need to put Social Security on a better footing in the long term, especially now that the first baby boomers are starting to retire.  And anybody serious knows that the outlines of the solution will be some combination of:
(i) an increase in the retirement age (just a little, not a lot), and
(ii) a future change in the indexation formulas to slow the rate of growth of benefits, perhaps in the progressive way proposed by Bob Pozen (nobody’s benefits would be cut, and even the slowed rate of growth would not apply to today’s retirees); and possibly, if necessary, also
(iii) a removal of the current cap on payroll taxes for higher-income workers.
(In my judgment anyone who says we can fix Social Security by privatization — privatization alone –is not “serious.”)

If such a solution were adopted today, it would do more to move the country credibly back onto the track of fiscal sustainability than a hundred repetitions of the recent congressional refusal to extend unemployment benefits and aid to states.  And it would do so without endangering the current economic recovery.    If we fix Social Security, the rest might wait until after the next presidential election.

There is still a catch, of course.  The third rail would still kill, if Democratic politicians tried to grab it alone.  We would certainly hear some version of the “death panels” nonsense that greeted President Obama’s attempts to cut the rate of growth of medical spending last year.   (To be fair to Republican politicans, the third rail also killed, in the past, if they were the ones who tried to grab it alone.)   Some courageous Senators are needed, to make the effort bipartisan. 

[Comments can be posted at RGE.] 

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