Social Security for Stimulus: The Trade of the Century

The federal government and the economy are caught in a fiscal dilemma. The economy is stumbling to its feet after a bruising fall, and risks falling again -- harder, and with even worse consequences. There is a strong case that it needs support from a new economic stimulus program, and soon.

At the same time, the public debt has reached heights not seen for almost half a century -- from the immediate wake of World War II -- and is growing unsustainably. Chilled by signs of renewed financial crisis in some debt-burdened European countries, some policymakers and citizens say that the nation must draw a hard line -- now -- and borrow no further.

Squaring this circle requires a package deal: We need legislation now that reduces deficits in the future to convince financial markets that a near-term stimulus is within the bounds of budget responsibility.

So, how to achieve that future deficit reduction?

Realistically, our elected policymakers cannot now solve the entire long-term deficit problem in one go. As is widely understood, the key driver of future deficits is health care. Not only are the Congress and the White House suffering from health care fatigue, but as they have learned over the last two years, health care is devilishly complex. The work of those two years fell far short of the savings needed to "bend the curve" of health-care costs -- much less deal with the public debt. Health care must be truly reformed -- but it will not happen now.

So any deal now will be only part of a long-term deficit solution, but must be consistent with a long-term solution. And it must give something to each side in the budget and policy debate -- that is, it must be a politically viable compromise.

By those standards, the "cats and dogs" of the budget -- annual appropriations, and miscellaneous entitlement programs - are not large enough or malleable enough to provide sufficient savings to motivate a stimulus-and-deficit-reduction deal. And though taxes will almost certainly be necessary to slay the long-term deficit dragon, a package based on tax increases and stimulus spending today is not a compromise -- and will not happen.

So what is left? Like it or not, the only remaining large component of the future deficit problem is Social Security. Impossible, you say? We need to think about it.

Social Security is not the primary driver of the long-term budget deficit. But it is an important contributor. It also needs repair in its own right. According to the latest estimates of the Congressional Budget Office, Social Security revenues this year will fall short of benefits, and they will do so again in 2016 and continuously thereafter.

Unlike health care, the remedies for Social Security are well understood and comparatively easy to estimate. The number of prospective beneficiaries is known with reasonable precision. And future earnings, which are about as predictable as anything in this vale of tears, determine the program's receipts. The policy options to deal with both outlays and receipts have been explored and mapped over decades. So unlike the struggle over health care, the solution for Social Security awaits not the discovery of knowledge, but simply political will.

How can fixing Social Security be part of a compromise? After all, it is seen as a low-income program, and for that reason some on the political left try to block any reduction in Social Security benefits.

But the reality is that Social Security will be repaired -- it must be. Its advocates should be the first to recognize that and pursue it in ways that best protect low-income recipients -- which can be done, if the repair is properly designed.

In any case, there is broad consensus that any Social Security repair must not touch the benefits of current and immediate future retirees -- at least not those with anything resembling middle-class total incomes. Current retirees have nothing to fear.

Many advocates of Social Security argue that "the budget must not be balanced on the backs of the elderly." They must recognize that an underfunded Social Security system pushes the budget out of balance, and moving the system to adequate funding moves the budget toward balance. Fixing Social Security is a natural "twofer," and there is no unfairness in that. Failing to repair Social Security, by adding to future deficits and rushing Social Security itself to a financial train wreck, threatens the very interests of those who will rely on the program in the future.

Some Social Security advocates insist that the program not be touched because its trust fund is projected not to be exhausted until 2039. Sadly, this view reflects a misunderstanding of the purpose of the trust fund, and of budget economics.

The trust fund was created as a short-term buffer to cover benefits in economic downturns, not a reservoir to fund the system year after year. Drawing down the fund simply forces the Treasury to raise cash from the public -- i.e. borrow. That borrowing has economic effects no different from any other deficit.

But if Social Security benefits are to remain an adequate retirement foundation for low-wage workers, the system will need more tax revenues, not just benefit reductions. Also, if current beneficiaries are to be exempt from benefit reductions, and near-term future retirees are to receive fair warning so that they can adjust their plans for future work and saving, then protecting the trust fund from its troublingly early projected exhaustion demands a near-term replenishment -- a few years down the road, after the economy has recovered - that can come only from revenues. So compromise on Social Security must come from both sides, and this is where those on the right must give ground. And only if the outcome is a balanced, bipartisan deal will financial markets trust that the repair actually will take effect a few years down the road.

As for the near-term stimulus part of the package, we should set much higher standards than the first bill. That bill created some completely new programs (health care information technology, "Race to the Top" grants for schools) whose delivery of "stimulus" to the economy has been agonizingly slow, whatever their other merits. This time, we must stick to the quickest-moving stimulus vehicles: extended unemployment benefits, aid to the states, perhaps temporary tax cuts.

To be effective, stimulus -- enabled by an attack on the deficit -- must be enacted quickly. The President's Fiscal Responsibility Commission, which surely is considering Social Security as a part of its charge, could be directed to begin a negotiation now.

The reflex reaction of many in Washington will be that every element of this imagined stimulus-now-and-deficit-reduction-later deal is "dead on arrival." But here is the cold shower for every interested citizen, whether considering this idea or any other: If we do not resuscitate many "dead on arrival" deficit-reduction ideas, then our economy will be "dead on arrival" -- and distressingly soon.