The 3rd-Rail Is Running Out Of Track

Social Security has long been known as the 3rd-Rail of Politics in large part because the program serves an audience with a high rate of voter participation. Politicians have historically avoided the discussion of reform for fear of the consequences at the voting booth.

This political calculus is however changing. The finances of Social Security are such that most Americans now expect to see benefits cut in their lifetime. Separately, there are few options which insulate voters from the impact from the changes necessary to preserve the system.  In short, the 3rd Rail is running out of track.

Earlier this month the Congressional Budget Office ("CBO") released a new projection for the Social Security Trust Funds which suggests that the combined funds will be depleted in 2030. If the Trustees confirm this finding in their 2014 Report on the Social Security Trust Funds, the system will have reached new milestones: a vast majority of voting aged Americans expect to retire after the system is unable to fulfill its promises.

2030 means that someone turning 70 today expects to outlive Social Security's ability to pay scheduled benefits.  Likewise, women who are 72 generally expect to live into the year 2030.  (SSA Life Expectancy Calculator) This projection means that people who are 52 and younger expect to retire after the Trust Fund is exhausted - more than 60% of voting aged Americans.

The demographics of the 3rd Rail were radically different just 5 years ago. In 2009, the Trustees projected that the system's solvency would extend for 28 years.  People who were 52 and older had a reasonable expectation that they would die before the consequences of Social Security would reach the public.  Even the average 40 year-old expected to collect some level of scheduled benefits.

Five years ago a near majority of Americans expected to be completely unaffected by Social Security's unfunded liabilities. The consequences of ignoring these problems fell on a small group of voters who were largely detached from the electoral process.  Five years ago, it paid political benefits to ignore the problem. 

The changing financial picture of Social Security has yet to materialize in polls.  Public confidence in Social Security is about the same as it was 25 years ago.  In 1988, public confidence in Social Security was roughly 49%.  Current polls shows that the figure is roughly 54%.  Even younger Americans have a surprisingly high level of confidence at 45% given that every one of those polled will be less than 45 when the Trust Fund plans to liquidate its last asset.

While the public's confidence in the system hasn't changed much, financials have changed substantially.  In 1988, Social Security was projected to be solvent for more than 60 years.  Today projected solvency is less than 16 years.  The cost to keep the system solvent has nearly doubled over the last 5 years. It is a matter of time before the deterioration of the systems financials begins to alter the how the 3rd Rail influences the nation's politics.

What should trouble everyone who believes in Social Security is the correlation between personal benefits from the system and confidence in the system.  The National Association of Social Insurance concluded from a poll a year ago, "Large majorities of Americans, both Republicans and Democrats, agree on ways to strengthen Social Security — without cutting benefits."  In that poll, 80% of the respondents said : I don’t mind paying Social Security taxes because I know that I will be receiving benefits when I retire - and 48% strongly agreed.

This poll contrasts sharply with a Reason-Rupe poll of younger Americans who are more skeptical that they will receive benefits from Social Security.  That poll found that 73% of this audience supports a new system with private accounts.  The poll further found that nearly half of younger people would replace the existing system even if current seniors had to have their benefits reduced.

According to multiple polls (here is one), people prefer increasing taxes to decreasing benefits. This preference is completely understandable because benefit reductions affect all future benefits where as tax increases cannot be applied to past earnings. The closer one is to benefits, the cheaper a tax solution is to the voter.  CBO for example projected that increasing the payroll taxes to 14.4% would increase lifetime contributions of those born in the 1960s by 6% and those born in the 2000s by 15%. In other words, the greatest impact would fall on those people who are 14 and younger.  Essentially this proposal is based on the idea that our children will pay the taxes that we won't.

Unfortunately, the tax-other-people alternatives are quickly losing the pretense of effectiveness. Advocates of Social Security frequently argue to increase the amount of wages subject to the Social Security payroll tax. In the apex tax solution, proponents suggest completely eliminating the payroll cap.  In 2010, Congressional Research Service projected that completely removing the taxable wage cap would solve 95% of the financing shortfall.  Earlier this month, CBO lowered its projection to 45% of the solution.  The point here is that solving Social Security's financial gaps will involve more and more personal sacrifice.

The dynamics of the 3rd Rail will change as more people start to look at how the exhaustion of the Trust Fund will affect them personally.  Current law would subject nearly all Americans to forced benefits cuts at some point in their life.  The options to preserve the existing system will have larger and larger impacts on the individual, rather than a nameless individual far in the future.

Social Security will always be a political lighting rod because of the amount of money that it controls. The nature of that force will change as the financial imbalances start to fall on current voters.  That change is occurring much faster than most realize.