Attention: Deficit

Should progressives embrace entitlement reform? Or look elsewhere to narrow the gap? An exchange between two leading fiscal experts.

One thing we definitely don’t need to do is cut Social Security by further raising the retirement age or otherwise reducing what future retirees will receive. The program is essential to many millions of Americans, including 4.4 million dependent children–about 3.5 million under age 18 and 900,000 adults disabled before age 22. Another 3.4 million children, though not receiving benefits, live in households with one or more relatives who do. But it is by no means overly generous; the annual benefit of about $13,860 a year for an average retired worker is only slightly above the poverty level of $10,830. Compared to 30 Organization for Economic Cooperation and Development (OECD) nations, the United States ranks 25th in the share of an average worker’s earnings that is replaced upon retirement by a country’s public pension program. And those Social Security replacement rates are already scheduled to be declining in the years to come, and will continue to be substantially lower for relatively well-off retirees compared to other beneficiaries. Contrary to the implication that the elderly population has an abundance of “greedy geezers,” just 13 percent of households headed by an individual 65 or over had after-tax non-governmental income of more than $50,000. Going after their benefits with a vengeance wouldn’t raise enough money to justify the effort.

According to Social Security’s trustees, the program will be able to continue paying full benefits until 2037. Over a 75-year period, the gap between promised benefits and revenues amounts to 0.7 percent of GDP. That’s barely a drop in the bucket compared to the overall budgetary shortfall attributable to health-care inflation, which is unrelated to Social Security. Gradually raising the Social Security payroll-tax cap back up to its past levels of 90 percent of total payroll income–which would increase the lid from today’s $106,800 to about $186,000–and removing the cap entirely for just the employer contributions would sustain current benefits in full throughout the 75-year time horizon. Only the top 6 percent of earners would be affected at all.

The economic crisis that we have not yet fully emerged from would have been far worse without the protections that progressives built over the course of many political battles since the 1930s. They are the essence of what we have accomplished at the national level to make our society more humane. The abundant work still to be done will proceed more successfully if we embrace those popular programs and explain to the public why we need to make them even stronger. Delivering on that promise without abandoning the Democratic Party’s well-established commitment to fiscal responsibility is the clearest path to restoring the public’s trust in government and progressivism. For all its imperfections, the health-care legislation, which will greatly expand medical coverage while reducing future deficits, embodies what our side is about. We believe not only in efficient government, but one that effectively protects all Americans from widespread risks like inadequate retirement savings, major medical costs, and disability.

Sawhill responds: Greg Anrig is right that my position on social-insurance programs is unorthodox. Arguing that these programs need to be transformed goes against the grain of traditional progressive thinking. But I believe that this transformation can be undertaken in a way that strengthens progressive values, paves the way for a restoration of faith in government, shores up the social safety net for the poor and working class, and frees up resources with which to tackle new problems.

Rather than repeat my earlier arguments, let me address his well-argued points. Anrig states that deficit mania threatens the nascent recovery. I agree that we need to stimulate the economy and that cutting the deficit right now would be a bad idea. However, the presumed tension between continued stimulus and fiscal constraint is a false one. It’s purely a matter of timing. We need stimulus now and restraint later. The restraint should be enacted now but gradually phased in as the economy improves. Without any fiscal discipline, the recovery is endangered. Concern in the financial markets about the sustainability of our spending could produce a sharp spike in interest rates at any time and leave another economic crisis in its wake. As it stands, spending is way out of whack with revenues and it’s only a matter of time before markets wake up and react in ways that could be disastrous for everyone, but especially for the less advantaged. Unemployment rates could surge way past 10 percent. To be sure, concerns about deficits have made Congress timid about supporting any new stimulus measures. But if the Administration and Congress were to enact credible legislation to bring spending and revenues into balance over the medium and longer term, that step alone would help defuse mounting anxiety over deficits.

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