How Big of a Deal Is Social Security?
Karl Smith of Modeled Behavior has moved to DC, and yesterday he honored the GMU lunch with what will hopefully be the first of many visits. During lunch, I asked Karl about a puzzling-to-me line from his latest post:
The issue, of course, is not whether the government can make Social Security solvent: lower benefits, higher taxes, or means-testing would all do the trick. The issue, rather, is how big these adjustments would have to be. And that, in turn, depends on how much the Aged Dependency Ratio will rise – the ratio of retirees to the working-age population. From the standard Census projection:
To my eyes, the basic numbers show that Social Security is, contrary to Karl, an enormous deal. Between 2010 and 2030, the Aged Dependency Ratio will rise 59%. Then it roughly stabilizes for the next two decades. Social Security has been in deficit since 2010, so without extremely unpopular cuts – or means-testing – fiscal balance will require combined Social Security tax rates to rise from 12.4% to about 20%. And that’s heroically assuming no disincentive effects of the tax hike.
Needless to say, such a tax hike wouldn’t make our heads explode. We’d live. But without major changes (by American standards), there will be a major fiscal crisis. The longer the U.S. delays, the worse the crisis will be when it arrives. And there is every reason to think that the U.S. political system will delay, delay, and delay again.