The latest Social Security Trustees Report contains a warning that neither political party should ignore. If Congress fails to act, Social Security's retirement trust fund is projected to become depleted within the next decade, triggering an automatic reduction in benefits of approximately 22 percent.
Predictably, the report has generated a familiar round of partisan finger-pointing. Some blame recent tax changes. Others blame decades of government overspending. Still others point to immigration policy or demographic shifts.
As an accounting professor, I see the issue somewhat differently.
Social Security's primary problem is not political. It is arithmetic.
The program was created during a period when America was younger, birth rates were higher, and the ratio of workers to retirees was far larger than it is today. The system functioned because a growing workforce supported a comparatively smaller retired population.
That demographic equation has changed.
Americans are living longer. Birth rates have fallen below replacement levels. Labor-force growth has slowed. The number of workers supporting each retiree continues to decline.
Congress can pass legislation. It cannot repeal demography.
Recent debates surrounding Social Security illustrate the challenge. Tax relief for seniors may provide welcome assistance to retirees, but any reduction in revenue ultimately must be offset if promised benefits are to be maintained. Likewise, proposals to expand benefits without identifying sustainable funding sources merely postpone difficult decisions.
In accounting, liabilities do not disappear because we choose not to recognize them.
Social Security is no different.
The reality is that every dollar paid in benefits must ultimately come from somewhere. The options are well known. Congress can increase payroll tax revenue, expand the wage base subject to Social Security taxation, dedicate additional general tax revenues to the system, modify future benefits, raise the retirement age for younger workers, or pursue some combination of these approaches.
What Congress cannot do indefinitely is promise benefits without addressing how those benefits will be financed.
Unfortunately, Washington has spent years avoiding that conversation. Politicians of both parties often find it easier to promise tax relief or benefit enhancements than to explain the long-term costs associated with those promises.
That may be good politics. It is poor accounting.
If a corporation discovered that its pension obligations exceeded projected funding, management would be required to address the shortfall. Additional contributions might be necessary. Benefits might need to be adjusted. New sources of revenue might have to be identified.
Shareholders would not accept a strategy of pretending the problem does not exist.
Taxpayers and beneficiaries should demand the same level of honesty from elected officials.
The encouraging news is that Social Security's challenges remain manageable if addressed in a timely manner. Modest adjustments implemented gradually over many years are far less painful than abrupt changes imposed after a crisis emerges. Expanding the taxable wage base, modestly increasing contribution rates over time, and dedicating additional revenues to the program could substantially improve long-term solvency while protecting current retirees.
The longer action is delayed, however, the fewer options remain.
For decades, policymakers have treated Social Security's financial challenges as a problem for future Congresses. The Trustees Report is a reminder that the future is rapidly becoming the present.
Social Security does not suffer from a partisan problem. It suffers from a mathematical one.
And arithmetic, unlike politics, does not negotiate.
