WASHINGTON – Going over the fiscal cliff on January 1st would mean huge income tax increases for all Americans and across-the-board cuts in most federal programs (except Social Security). I believe Congress and the White House will do all that must be done to avoid such a shock to our economy.
But the reason for the fiscal cliff – an exploding national debt – won't go away until Congress and the White House reach agreement on a long-term deficit-reduction solution. Although there are differences over the details, there is broad agreement in Washington that this should consist of comprehensive, pro-growth tax reform and common-sense spending reforms that include shoring up the finances of Social Security and other entitlement programs.
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More than 60 percent of current federal spending goes to entitlement programs, mostly Social Security and Medicare. To put that in perspective, if we eliminated all federal spending except entitlements – that is, if we spent no money on highways, national defense, medical research, food safety, etc. – this year's federal budget would be just barely balanced and would not affect the debt at all.
In a few more years, eliminating all non-entitlement spending wouldn't be enough to balance the budget. That's because both Social Security and Medicare costs will grow faster than our economy for the next several decades, as the largest generation in our nation's history gets ready to retire. At the same time, there are fewer Americans in the workforce to contribute payroll taxes to cover those benefits.
Some have pointed out that both programs are financed by payroll taxes and have accumulated surpluses in previous decades (essentially IOUs from the U.S. Treasury). But payroll taxes no longer cover the costs of benefits, and surpluses are dwindling. The non-partisan Congressional Budget Office (CBO) currently estimates a payroll tax shortfall in Social Security of $59 billion in 2012, $76 billion in 2013, and $86 billion for both 2014 and 2015.
Social Security's situation is on course to run out of money for full retirement benefits in 2033. Although that seems a long way off, waiting until then to address Social Security's finances probably would require a big payroll tax increase or a cut in benefits – or both. But modest, incremental changes over the next few years will protect benefits for current retirees and for those who are about to retire, as well as preserving Social Security for the next generation.
I have put forth a plan, the Defend and Save Social Security Act, to preserve and strengthen Social Security. My approach is sensible, fair, and easy to implement.
First, as Americans live longer, it makes sense to increase the retirement age gradually – without impacting those who are about to retire. Under my bill, anyone who is currently 59 years or older would not be affected.
For everyone else, both the normal retirement age and early retirement age would increase by three months each year, starting in 2016. That means the normal retirement age would reach 67 by 2019, 68 by 2023, 69 by 2027, and 70 by 2031. The early retirement age would also be gradually increased to 63 by 2019 and 64 by 2023.
Second, the annual cost-of-living adjustment, or COLA, would be computed as it is under current law. However, my bill would shave off 1 percent of the COLA in any year it exceeded 1 percent. (If an annual COLA adjustment is less than 1 percent, there would be no change.)
Social Security's Chief Actuary calculates that my legislation would ensure full retirement benefits for at least 50 years – as well as reducing deficits by $631 billion over the next 10 years.
In its current form, Social Security is headed for insolvency. The question isn't whether to act, it's when. I believe it is better to act now, while there is time to gradually implement changes, over the course of several years, rather than suffering a massive disruption to the program all at once. By doing this, there would be no cuts in Social Security's core benefits and no payroll tax increase on workers today.
This column was written by U.S. Sen. Kay Bailey Hutchison.