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No matter what President Joe Biden and former President Donald Trump promise, and no matter how untouchable Social Security has been in the past as the “third wire” of American politics, Social Security will be fixed in some form within the next decade. While both candidates are misleading voters, it is the Republican Party that will suffer the most by ignoring the issue of Social Security.
First, a little background. It doesn’t matter that some people believe the money for Social Security is in accounts in their names, or that some people believe Biden and Trump’s words that they won’t touch Social Security. If Congress doesn’t act before the Social Security Trust Fund expires, benefits will automatically be cut by about 20%. Once there are no assets to make up the difference between payroll tax revenues and benefits, and because not enough taxes have been collected since 2010 to cover Social Security, Social Security will revert to a pay-as-you-go system.
That’s the law: Benefits will be cut because the Social Security Administration is only allowed to pay benefits that are funded by payroll taxes collected.
This is an immutable reality. When Biden and Trump say they will leave Social Security untouched, they are tacitly accepting that their benefits will be cut by 20%. That’s one way of doing it. But other politicians would not want such cuts to happen, fearing a backlash from hordes of outraged voters who will turn out in droves on Election Day. So what else could happen?
Republicans have been the party of fiscal responsibility for much of their history, but if they don’t insist on and enact meaningful reforms before the trust funds are depleted — or even wait until the last minute — that leaves a lot of room for Democrats to tackle the problem the way they want to. Historically, Democrats have favored preserving or even expanding Social Security. Their solution would likely involve higher taxes and an increase in the government debt.
Tax increases could take a variety of forms, including higher payroll taxes, higher income taxes, or new taxes targeted at the wealthy. While this approach may sustain gains in the short term, it also very likely will slow economic growth by reducing incentives to work, start businesses, and invest.
Another scenario is to finance the shortfall in Social Security with a further increase in government debt. This would mean issuing more national bonds, which the government would eventually have to repay with interest. Higher national debt levels would lead to higher interest rates, potentially crowding out private investment and accelerating inflation. Moreover, the burden of this debt would fall on future taxpayers, exacerbating intergenerational inequality.
Republicans must recognize the urgent need for Social Security reform, if only to protect themselves. Reasonable options include gradually raising the minimum retirement age, adjusting benefits to reflect rising life expectancies, and implementing fair means testing to ensure benefits get to where they are actually needed. Moreover, encouraging personal savings and investment through tax-advantaged accounts could help reduce older Americans’ reliance on government programs.
It’s understandable why Republicans think they have nothing to gain from Social Security reform if they take power, but there’s one benefit they’re overlooking.
The Congressional Budget Office is well known for projecting future trends in the debt-to-GDP ratio based on current policies, not necessarily future policies. This means that their projections may include tax increases or spending cuts that never actually occur. There is one exception to this rule: when modeling the impact of depleting the Social Security Trust Fund. In this case, instead of showing the benefit cuts currently scheduled in law, the Congressional Budget Office assumes that general revenues (i.e., debt) would be used to cover the Social Security shortfall.
If Republicans are willing to reform Social Security when they return to power, they could use this to their advantage. (The same goes for Medicare reform.) In fact, CBO projects that Social Security reform will reduce the debt going forward. This would be a much-needed debt reduction and could be a big win that Republicans can use to regain fiscal responsibility. The evidence for this is now, for the first time, easily seen in the numbers.
But failure to act creates a fiscal scenario in which Republicans have little leverage while Democrats push through their preferred “solutions.” The resulting higher taxes and rising debt will have far-reaching, unhealthy effects on the economy and future generations. In contrast, wise Republican reforms will be rewarded with lower debt and an immediate path forward. It’s a win-win.
Véronique de Rugy is the George Gibbs Professor of Political Economy at George Mason University and a senior research associate at the university’s Marketas Center.
