No matter what President Joe Biden and former President Donald Trump promise, and whatever its past as the untouchable “third way” of American politics, Social Security will be modified one way or another in the next decade. Both candidates are misleading voters, but the party that stands to lose the most by ignoring the Social Security issue is the Republican Party.
First, some background information. It doesn't matter whether some people continue to believe that their Social Security money is in an account with their name on it or whether they believe Biden and Trump's words to stay out of the program. If Congress doesn't act before the Social Security Trust Fund expires, benefits will automatically be cut by about 20%. If there are no longer assets to fill the gap between payroll tax receipts and benefits paid, and if not enough taxes have been collected since 2010 to cover Social Security, the program will revert to a pay-as-you-go system. .
That's the law. Social Security is only allowed to pay benefits that are included in the payroll taxes collected, resulting in a cut in benefits.
It is an immutable reality. When Biden and Trump say they won't touch Social Security, they are quietly admitting they will cut benefits by 20%. That's one way. But other politicians may not want those cuts to happen, fearing a backlash from large numbers of angry voters on Election Day. So what else could happen?
If Republicans, who have been the self-described party of fiscal responsibility for most of their history, fail to advocate and enact meaningful reforms before the trust fund is depleted or wait until the last minute, they are leaving the door wide open for Democrats. Solve problems in your own preferred way. Historically, Democrats have favored maintaining or even expanding Social Security. Their solution will likely include increased taxes and increased government debt.
Tax increases can come in many forms, including increased payroll taxes, higher income taxes, and new taxes targeting the wealthy. While this approach may preserve profits in the short term, it is also very likely to slow economic growth by reducing incentives for work, entrepreneurship, and investment.
Another possible scenario is to finance the shortfall in Social Security with more government debt. This means issuing more government bonds, which the government must eventually repay with interest. Higher levels of national debt lead to higher interest rates, which discourages private investment and potentially spurs inflation. Moreover, the burden of this debt will be passed on to future taxpayers, exacerbating intergenerational inequality.
Republicans should recognize the urgent need for Social Security reform, if for no other reason than self-preservation. Reasonable options include gradually raising the minimum retirement age, adjusting benefits to extend life expectancy, and implementing fair means tests to ensure benefits flow where they are actually needed. Additionally, encouraging private saving and investment through tax-advantaged accounts could help reduce older Americans' dependence on government programs.
I can see why you would think that even if the Republicans were in power, they would have nothing to win by reforming Social Security. That said, there is one benefit they are overlooking.
The Congressional Budget Office (CBO) is well-known for predicting the future path of the debt-to-gross domestic product (GDP) ratio based on current (but not necessarily future) policies. That means projections may include tax increases and spending cuts that won't happen. There is one exception to this rule. This is the case when modeling the effects of depleting the Social Security trust fund. In this case, CBO assumes that general revenues (meaning debt) will be used to fill the Social Security gap, rather than indicating benefit cuts currently scheduled in law.
If Republicans are willing to reform Social Security when they return to power, this could be used to their advantage. (The same goes for Medicare reform.) In fact, CBO projects that Social Security reform will lower debt going forward. This is a long-awaited debt reduction and a potentially big win that Republicans can use to regain fiscal responsibility. The proof can be easily seen in the numbers.
But failure to act would result in a fiscal scenario in which Republicans would have little influence as Democrats pushed their preferred “solution.” The resulting tax increases and increased debt will have far-reaching, detrimental consequences for the economy and future generations. In contrast, if they reform wisely, Republicans will be rewarded with a lower and more immediate debt path. It's a win-win.
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