In Which I Discuss A Potential Debt-Limit Solution

This is a cross-post from the blog of the DCYRs. I suggest that revising the accounting of Social Security benefits to reflect actual wage and population growth could be a way for politicians to claim that they've made real cuts, put the system on an actuarially sound footing, and restore faith in the state retirement system.

How to Cut Spending by 25% Without It Costing a Dime

The furious debate in Washington, DC this Summer is over the so-called debt limit, a rule which forbids the treasury from taking on more debt if certain federal accounts exceed a set value.
As a price for increasing this value, Democrat and Republican congressmen are demanding tax increases and spending cuts. But what they won’t admit is that not a dollar of current spending will be reduced – the cuts are all to future projections. This year’s spending was authorized earlier this past Spring and future Congresses can always ignore what this one decides.
The various spending proposals are “scored” or calculated based on best-guess estimates of future revenue and spending based on current law. Those making the estimates are required to assume that future Congresses won’t change the laws mandating taxes or spending. That is one large assumption.
In conversation, most members of the younger generation will admit that they don’t expect to see a dollar back from the money they’ve paid into Social Security. This isn’t strictly true, they will receive something. Social Security’s trustees estimate that they will be able to pay about three-quarters of currently-promised obligations based on employment tax income and redeeming the intra-government IOUs in the trust fund.
And therein lies the problem. Promised obligations due are a legal fiction which have no relation to the actual demographic or economic state of the country – only upon what the laws are written to say.
What we should do is simply change the law. Change the law to have it be honest.
If the law reflected what the system could pay, rather than what politicians think it should pay, we would put Social Security on a sound footing and reduce the notional obligations politicians are arguing about overnight.
Of course there is the issue that only some debt is counted against the limit and this doesn’t include all of Social Security’s obligations. This fact that only some of our legal obligations are counted is another reason why the current argument is so ridiculous. Much of the spending that is being argued about – entitlements such as Medicare, Medicaid, and Social Security – doesn’t get counted against the debt limit until the government adds another IOU to the trust fund.
Changing the accounting of social Security could represent a cut of over $5 trillion to future spending, a figure far larger than the values of $2 to $4 trillion currently being tossed around in negotiations.
Of course opponents would claim that this was a cut from our elderly’s retirement. But this is false. The money is already spent and only held on ledgers in the form of IOUs from one government agency to another. This reform would simply change expectations to line up with reality.
And changing those expectations matters. By knowing what they were actually likely to get from the system, people would have a better idea of how much they would actually need to save for their own retirement. Rather than treating Social Security as a corporate pension, people would view their prospective payouts more like a 401K, whose value can fluctuate over time. By setting an accurate account they may even begin to regain some trust in the system, something that is sorely lacking today.
These savings would be no more fictional than any of the others being debated and because they are going to happen anyway as payments into social security lag, they might even have a chance of becoming real.