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What should we do about Social Security?

For the last couple of decades, Social Security analysts, public trustees, and even both Republican and Democratic Presidents have warned that unless the program is fixed, it faces perpetual cash-flow deficits. And now, the Congressional Budget Office (CBO) says that those perpetual deficits have arrived.

As a result, it is even more urgent that Social Security is fixed and placed on a firm fiscal footing. While the program will be able to pay the benefits that it has promised older Americans, younger workers can expect a 22 percent across-the-board benefit cut that will hit everyone, including those with the lowest incomes. The only way to avoid that scenario is to change the system.

A few months ago, the Social Security Administration (SSA) reported that those permanent deficits would not arrive until 2016, but the new CBO budget estimates say that SSA was overly optimistic. The agency says that Social Security will pay out more than $600 billion more in benefits than it will receive from its payroll taxes and other revenues in just the next 10 years alone. Every year between now and 2021 will see deficits of between $28 billion and about $120 billion. (In order to get the CBO estimated cash flow situation for each year, subtract the non-cash paper interest payments from Social Security’s predicted revenues, and then compare that number to its predicted benefit payments.)

SSA’s 2010 report showed that the program ran a cash flow deficit in 2010 and predicted another in 2011, both mainly due to the effects of the recession. Most of those deficits came from workers over the age of 62 who lost their jobs and had to claim Social Security benefits earlier than they had planned. The rest came from the way that high unemployment reduced SSA’s payroll tax collections. However, SSA expected the economy to bounce back faster than CBO now predicts. This slower recovery accounts for the additional cash-flow deficits.

Fixing Social Security will not be easy, but it is certainly not impossible. One way to start the process would be to recognize that people are living longer and gradually increase Social Security’s retirement ages. Another would be to focus scarce revenues on those who need them by gradually reducing the benefits paid to upper income retirees. The worst outcome would be to do nothing and allow the coming automatic benefit cuts to hit the lowest-income retirees who would already be just barely able to meet their expenses.

The CBO’s new estimates are the latest in a series of wake-up calls. The longer fixing Social Security is delayed, the more sacrifice will be needed.

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