Why Washington Must Be Put on a Tough Allowance

The federal government has promised citizens $200 trillion in benefits that it has no hope of funding.

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Response to last week's draft report from the co-chairs of the Obama deficit reduction commission is very disappointing. In a giant game of chicken, everyone agrees that deficits must be cut but no one wants to go on the cutting board themselves. Increasingly, I am convinced, Washington should be treated as a child, with citizens playing the role of parent. And what this parent needs to do, quite simply yet profoundly, is to put its child on an allowance. This is not an allowance that leaves wiggle room. Such discretionary power is what got us into this mess.

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Washington includes elected officials and, of equal importance, a literal horde of business and social-policy special interest groups. Last week, the decibel level of the whine factor from this unelected, cause-driven constituency was turned up full blast. I share the sentiments of Peter Orszag, the former head of the Congressional Budget Office. He is talking here about Social Security but his comments apply more broadly: "It's too bad their proposal has been greeted with so much criticism, especially from progressives—who really should look at it as an opportunity to fix Social Security without privatizing it."

Specific Social Security changes recommended in the draft include raising the retirement age by a year to 68 by the year 2050, and another year by 2075, reducing the amount of the annual cost of living adjustment for benefit payments, boosting support for low-income retirees, gradually raising the percentage of wage income subject to Social Security taxes (the ceiling is now $106,800), and creating more flexible choices for when people can elect to begin receiving benefits.

When all is said and done, Social Security benefits would be raised for low-income employees and cut for everyone else. The proposed changes are progressive, meaning that benefit cuts would be the largest for higher-income earners. The reductions become especially pronounced over the next 40 to 60 years, according to an assessment of the proposals done by Social Security's chief actuary.

Here's what the changes would mean for a medium wage earner who retires at the age of 65 with the equivalent of $43,084 in 2010 Social Security earnings (meaning that's the average of their highest 35 years of earnings): benefits would be reduced by 1.5 percent for people turning 65 in 2020, 9.3 percent by 2030, 18.6 percent by 2040, 27.4 percent by 2050, 31.1 percent by 2060, 32.9 percent by 2070, and 34.8 percent by 2080. Clearly, younger employees would not enjoy the same benefits as today's retirees.

[See Raising Social Security Retirement Age Is No Simple Fix.]

But they would be able to count on those benefits. While there can be arguments about exactly how progressive the program should be, the bigger picture is that people would be getting their fair share in a viable system that was self supporting. Isn't that, in fact, what shoring up the system should do? When Social Security was started in 1935, it was never intended to be a retirement mainstay or a replacement for pensions and retirement investments. Today, by contrast, an alarmingly high percentage of retirees have little except Social Security to fall back on.

That's a national tragedy and its reasons are numerous and contentious. But the fact is that we cannot afford the Social Security system we have. We need some combination of higher taxes and lower benefits. Phasing such changes in over time gives most people decades to shore up their own retirement investments. And while it's fine to argue that the system shouldn't be looked at to solve deficits in other programs, isn't the reverse true as well? Opponents of the changes seem to think that other parts of government should make up for the system's long-term deficits.

One of my favorite curmudgeons, Boston University economist Lawrence Kotlikoff, has an opinion piece in Forbes that calls baby boomers the "Greediest Generation," in an obvious contrast to the "Greatest Generation" that preceded it. "Uncle Sam has spent decades running the world's largest Ponzi scheme, taking ever-larger sums from each young generation and handing them to the old in the form of Social Security, Medicare, and Medicaid benefits," Larry writes. "In so doing, Sam has told each set of young people, 'Not to worry, I'll more than take care of you when you're old.'"

Of course, younger and older people alike have become quite worried about how we can possibly keep all the spending promises we've made. Kotlikoff estimates this "fiscal gap" at more than $200 trillion. No one really expects Uncle Sam to honor all these commitments. We don't really believe much of what anyone in Washington is saying these days. Why in heaven's name should we?

After objecting to proposed changes in Social Security contained in the draft, AARP went out and got more than 900,000 signatures for a petition to President Obama. The petition, AARP says, urges "the President's deficit commission not to cut Social Security to reduce a deficit it did not cause." This is a strange emphasis in that the co-chair's draft specifically said that one of its principal goals is to "reform Social Security for its own sake, not for deficit reduction."

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What's particularly scary about the lines in the sand being drawn over Social Security is that its financial imbalance is one of the easiest to fix. In its current form, the program still projects being able to honor all payments for the next 27 years. The same can hardly be said of other entitlement programs. And perhaps the shortest fuse of all can be applied to the sustained value of the U.S. dollar. If substantial progress to close the deficit cannot be achieved in the next couple of years, our ability to finance our deficits by selling U.S. securities will be compromised in painful ways.

The New York Times has created an interactive budget tool that you can use to balance the budget yourself. Slash programs. Raise taxes. See how you do. The tool is an admittedly imprecise instrument but you will be able to see clearly that we ran out of easy options a long, long time ago.

Twitter: @philmoeller