Why Marco Rubio's fearmongering about Social Security is so clueless
What debt crisis?
One of the most remarkable features of the American political landscape is the widespread conviction that Social Security is doomed.
According to Gallup, 51 percent of Americans in 2015 didn't think Social Security would pay them a benefit when they retire. Among Americans under 30, it was 64 percent.
The apocalyptic rhetoric from some of our politicians is probably a factor here. "Anyone who tells you that Social Security can stay the way it is is lying," Sen. Marco Rubio insisted at the Republican debate in Florida last week. Sen. Ted Cruz declared that Social Security "is careening towards insolvency." Rubio wants to cut Social Security's benefits and raise its retirement age, while Cruz and John Kasich suggested partial privatization. Even Donald Trump, who wants to leave the program's benefits and retirement age alone, said spending had to be cut elsewhere. No one contested Rubio's central thesis that "if we don't do anything, we will have a debt crisis."
So let's unpack this idea that if we don't tame Social Security and other entitlements like Medicare, we're all headed for Mad Max: Fiscal Apocalypse.
The first thing to understand is that Social Security's looming "insolvency" is merely a looming cut in benefit payments. Right now the retirement of the Baby Boomers is projected to drain the program's trust fund dry, at which point the law says annual benefit payments to retirees will have to be drastically decreased to bring them in line with annual revenue from the payroll tax.
But here's the thing: The trust fund is not a savings account outside the government. It exists entirely within the government's own finances and always has — an intermediary step between its revenue and spending. If the government wanted to simply ignore the depletion of the trust fund and continue paying out all promised Social Security benefits in perpetuity, it could.
In fact, projections of future government spending by the Congressional Budget Office (CBO) — which give Rubio and everyone else the talking point that the U.S. is headed for a "debt crisis" — already assume this is what Congress will do. That future spending is a large part of why CBO also projects a rising debt load in the coming decades. If Congress actually did cut Social Security benefits when the trust fund depletes, the CBO's future spending projections would drop dramatically.
So when Rubio said "Social Security will go bankrupt and it will bankrupt the country with it," he got things exactly backwards. CBO's debt projections assume that nothing happens to Social Security benefits. The debt crisis and the Social Security crisis are mutually exclusive.
But Rubio's even more wrong than this.
Here's the long-term spending projection CBO made in 2015. It includes all the major categories — Social Security (in blue), Medicare, Medicaid, CHIP, and ObamaCare (in red), interest on the debt (in brown), and everything else (in green) — through 2040:
What stands out? First off, the "everything else" category slowly falls as a percentage of the economy over the entire time period. So that's definitely not driving the debt problem.
As for Social Security, it will rise from 4.9 percent of GDP to 6.2 percent, as America's retirees grow as a portion of the overall population. But the rise stops by 2035, after which spending stays at 6.2 percent. Once we get "over the hump" of the Baby Boomers' retirement, our demographics will stabilize. Long term, we just need to come up with an extra 1.3 percent of GDP to cover all of Social Security's benefits as promised.
That will not be hard. Total tax revenue for all levels of government was 26 percent of GDP in 2014. Other advanced countries like Canada, France, and Germany bring in considerably more. A few go almost to 50 percent, with no discernible damage to their economies. A lot of oxygen gets spent on changes we could make to the payroll tax specifically to come up with that extra 1.3 percent, but the revenue can actually come from anywhere. And we have a host of options. This may be a political or an ideological challenge, but it is not an economic one.
What of the rising spending on health programs and interest rates? That's the problem, according to CBO's projections. But to say that predicting the future of these programs is tricky is a massive understatement. Health care programs like Medicare don't simply send people checks; they buy them health care. So to project this spending CBO has to make an educated guess about the path of health care costs for the next 25 years. It has to guess what the Federal Reserve will do about interest rates and how financial markets will behave.
In fact, in recent years CBO has consistently and dramatically overshot the path of interest rates on the U.S. debt load.
This all introduces huge variability into future debt projections. If health care costs continue slowing (thank you, ObamaCare) and interest rates increase less than CBO projects, and other things like productivity growth and mortality rates go our way, it's entirely possible the debt will only rise from 74 percent of GDP to 78 percent by 2040.
And even if debt does reach 140 percent or 175 percent in 2040, under CBO's worst-case scenarios, so what? Interest rates on our debt have been trending downwards for decades, and are now at historic lows. Japan's debt is 226 percent of GDP, and it has not suffered a debt crisis and still enjoys remarkably low interest rates. As advanced nations, America and Japan both have the advantage that they issue their own currency. In a pinch, they can pay off their debt obligations by printing money rather than with tax revenue. The only upper limit on that is inflation, and inflation rates for both countries are rock bottom. The simple fact is, we have no idea what debt load America can carry.
So not only is Marco Rubio wrong that Social Security is contributing to the debt crisis, he's quite likely wrong that there's any looming debt crisis it could contribute to. My fellow Millennials will get their Social Security checks when they retire.