Social Security: What Does AARP’s Move Mean for the Debt Debate

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UPDATED 4:06PM 6/17/11

When it comes to solving America’s debt “problem,” what we usually hear about is spending cuts or tax increases. Few talk about cutting Social Security. The program is wildly popular. It’s also a huge contributor to the nation’s debt problem. That’s why today’s news, via the Wall Street Journal, that the AARP may be shifting its position on the national retiree benefit program could be huge break in the battle over how we should reduce the U.S. debt. Apparently, the debate inside the lobbying group was heated. But it is expected that the AARP’s public stance will soon favor some benefit cuts for seniors receiving Social Security. It’s not clear yet what cuts the group would support. But that group has had a huge influence over debates about Social Security in the past. And anything that stops the growth of Social Security could make a huge difference in the budget debate.

But before everyone starts doing victory laps, there are some significant risks here in changing Social Security. Here’s why:

Yes, Social Security has its problems. Envisioned as a safety net, it is very much an entitlement program. Everyone pays in and everyone gets out – no matter whether you need assistance in retirement or not. And Social Security’s presence significantly changes our nation’s debt picture. The nation’s debt has soared since the financial crisis, but about a third of the government’s IOUs are to itself. And the largest portion of those IOUs are due to the Social Security trust fund. In fact, obligations to the Social Security and other government-run trust funds account for about half the overall rise in debt since 1995.

So 90% is the number that gets most talked about by people who are worried about our nation’s debt. That’s the size of our debt expressed as a percentage of our GDP. It’s also the point at which debt can have a negative impact on growth. But here’s the thing: If you remove all those government IOUs, our national debt is more like 70%, and it would be another decade until we hit that 90% breaking point, and that’s if we do nothing. If growth gets a little better, or we take some steps to reign in the debt, then the picture by then could be dramatically better.

That’s why Social Security is such an important piece of the puzzle. Cut Social Security and perhaps we don’t have to talk about dramatically cutting government spending elsewhere, which could really hurt growth and put more people out of work.

But there are dangers here as well. Despite its flaws, Social Security is a pretty good retirement system. It’s far superior to our current private retirement savings system, which has become dominated in the past few decades by the 401(k). Unlike 401(k)s, Social Security retirement accounts held their value during the financial crisis. And for most people the 401(k) system will not provide nearly enough for retirement. Cut Social Security, particular if those cuts are made for everyone and not just the wealthy, and many seniors will be in serious trouble. So any cut in the Social Security program needs to be paired with some kind of revamping of the nation’s private retirement savings system as well. Early in the Obama Presidency there was talk about improving 401(k)s or replacing them with something better. But retirement reform has been put on the back-burner – deemed less important than solving the nation’s economic woes and healthcare reform. But 401(k) reform might be a bigger piece to this whole economic debate than we thought.

UPDATE: The AARP has sent out a statement that it has not changed its stance on Social Security. Here’s what AARP CEO A. Barry Rand had to say: “Let me be clear – AARP is as committed as we’ve ever been to fighting to protect Social Security for today’s seniors and strengthening it for future generations.  Contrary to the misleading characterization in a recent media story, AARP has not changed its position on Social Security.” Nonetheless, WSJ.com has not taken down their story so my guess is that they are sticking by their reporting. Either way, the story of Social Security remains the same. If we really want to do something about the debt problem, we are not going to solve it without first looking at Social Security. And if we are going to look at Social Security we really need to revamp our entire retirement savings system.

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