Kent Smetters, director of the Penn Wharton Budget Model, on the looming Social Security funding crisis.
Social Security is expected to become insolvent within a decade, and with the main safety net program facing the prospect of automatic benefit cuts when that happens, a critical debate over the cost of replacing that revenue could be obscured by a budget rule.
Kent Smetters, director of the Penn Wharton Budget Model, spoke exclusively with FOX Business about a new report that details how federal budget rules assume Social Security benefits would be paid entirely using general revenue transfers when the program’s trust funds become insolvent in about six or seven years.
“What the law actually says is that when the trust fund is depleted, benefits must be reduced to a level that is just the monthly payroll taxes coming in. We estimate that’s about a 15 percent reduction in benefits, which is considerable,” Smetters said, adding that the reduction would apply to both new entrants and existing enrollees.
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Smetters said a separate law covers how the nonpartisan Congressional Budget Office (CBO) would assess the cost of depleting trust funds and general fund transfers to make it appear there was no cost to transfer borrowing to the general fund as spending continues.
Social Security benefits would be automatically reduced by law if the main trust funds become insolvent, although a budget rule obscures the cost of transferring the funds from general revenue. (Al Drago/Getty Images)
“We all know it’s like the left hand pays the right hand or vice versa. This does nothing to solve the real financing problem. But nevertheless, it will make it look like it costs nothing, zero dollars, even though general revenue borrowing will be substantial – almost 200 percent of GDP within 75 years, or more than 400 percent of taxable payroll over 75 years,” Smetters said.
He warned that the fiscal rule could “almost cast a spell on what’s actually going to happen, because I think policymakers are going to see that it’s kind of like the easy button to make it look like they’ve solved Social Security.”
The approach of relying on general cash transfers to fill the gap needed to pay Social Security benefits in full could also raise alarms in bond markets and worsen the country’s fiscal woes through higher interest rates.
Smetters said that “bond markets are currently betting that Congress and the president will eventually get their act together, because if they don’t, future bond markets will only hit them,” adding that general revenue transfers would serve as “the ultimate sign that we’ve given up.”
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The CBO’s most recent 10-year budget outlook estimates that Social Security’s main trust fund would be depleted in 2032, with benefits reduced by an average of 28% per year after the benefit cut. The benefit reduction would amount to about $2.7 trillion in reduced benefits over the period 2032 to 2036, according to the CBO.
Smetters noted that although the CBO and Penn Wharton budget model projections differ slightly on the timing and magnitude of benefit cuts, since PWBM estimates insolvency will occur in 2033 with benefits reduced by 15%, policymakers must address the fiscal challenges facing Social Security as soon as possible.
“Even though seven years is not that far away, the good news is that there are a range of options,” Smetters said, noting that Penn Wharton’s budget model website offers a set of seven illustrative options ranging from large increases in tax revenue to large reductions in benefits, with a happy medium in between.
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Social Security is trending toward insolvency in 2032 or 2033, according to various projections. (Getty Images/stock)
Smetters said that while various solutions to prevent the depletion of trust funds and reduce the federal debt have different long-term economic outcomes, there is still time for a rational discussion.
“Unless we take a clever approach in terms of general revenue transfer, the fact is this really requires having adults in the room on both sides of the aisle,” he said.
Smetters pointed to Social Security reforms made in the 1980s by then-President Ronald Reagan and Democratic House Speaker Tip O’Neill that put partisanship aside.
“They decided that we were going to jump off this bridge together because the country was worth it, and they were going to put aside their personal politics and their personal ambitions to solve this problem,” Smetters said. “We just don’t have that kind of rhetoric right now.”
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“The longer we wait, the more likely it is that this is just an optical switch, which will make it look like we’ve solved Social Security even though we haven’t done anything, and that we’re going to absorb these very large budget deficits going forward,” he added.
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