Why There Are No ‘Fair’ Solutions Out of the Federal Government’s Spending Quagmire
By Foundation for Economic Education (FEE)
The federal government is facing very serious budget issues, dramatically worsened by the past few years’ expansion in profligate spending. But while that gets most of the fiscal headlines at the moment because of the national debt limit discussion, the Social Security and Medicare Trust Funds have far more unfunded liabilities than the official federal deficit. And those huge problems are well past the “something should be done” stage and getting very close to the “something must be done” stage. That has led some to reconsider reforming Social Security, the famous “third rail” of politics.
The mere possibility of that has energized those who fear that a change from the status quo might give them less, even though the huge financial holes involved cannot be sustained for long, meaning that “doing nothing” for now guarantees a worse deal for many soon. So such opponents are gearing up to prevent any move toward improved fiscal responsibility and sustainability that might involve reducing anyone’s benefits now or in the future by asserting that it would be unfair.
Unfortunately, however, if we rule out all options that might “unfairly” reduce benefits for current or future beneficiaries, we must be unfair to others. The reason is that the federal government has promised trillions of dollars more in benefits than taxes to fund them through Social Security (and even more so for Medicare), and those overpromises leave no fair way out.
Consider the option of reducing Social Security retirement benefits in one way or another. That is not fair, because government promises of ongoing retirement support have led people to believe in continued funding at the promised levels, and to adapt their behavior to those promises. Having done so (e.g., saving less privately for their retirement), it is unfair to cut that funding, because many who relied on benefit promises have become dependent on the government living up to them.
But there is a good reason for considering this possibility—if we continue to do nothing to change things, the trust funds will soon run out and benefits will have to fall substantially from then on, which would also be unfair, and potentially even more so.
Despite that, if history is any guide, any serious proposal of potential benefit reductions will not lead to rational discussion, but fights to make sure someone named “not us” will bear as much of the burdens as possible. We will witness a “guilt parade” of the most obviously pitiful and destitute beneficiaries, none of whom should be forced to “do without,” to remind us of its unfairness (just as we see struggling family farmers when agricultural or water subsidies are under fire; the most seriously ill when medical benefit cuts are proposed; poor, inner-city children when cuts to education funding are considered; etc).
Now, this fairness argument is partly correct. But only partly, because it does not consider the fairness of the alternatives. While benefit cutbacks can be considered unfair to those now and soon-to-be dependent on them, every alternative is unfair as well. Rather than choosing between fair and unfair options, we must choose between unfair ones.
Say we look to maintain benefit promises through substantially higher Social Security taxes. The problem is that people have also adapted their behavior to the promised extent of those taxes (already greater than income taxes for the majority of Americans), and some now depend on not losing any more take-home pay just as many recipients depend on not losing anticipated benefits.
Proposing that we just tax “the rich” more, as by increasing or even eliminating the income limits on Social Security “contributions,” would especially increase its unfairness to higher income earners, who are already paying far more in Social Security taxes than they will ever get back in benefits, and who also pay a sharply disproportionate share of income and other taxes as well (not to mention being in the crosshairs for further increases in those taxes).
Benefits could be maintained without increasing Social Security taxes by federal borrowing. But borrowing is just deferred taxation, so that would unfairly burden whichever taxpayers will be left holding the bag for those taxes. It would also increase the tax uncertainty faced by all Americans, who face a harder task of guessing how, where, when, and on who those future taxes will be assessed.
What about some sort of privatization? That could potentially increase the rate of return earned on retirement savings relative to what Social Security offers, improving the system from this point in time forward. However, such a move cannot magically eliminate its current multi-trillion dollar unfunded liabilities. And if future benefits are to be more closely based on private contributions than the current system, as privatization would require, treating those savers more fairly would unfairly take funds now used to subsidize the retirement of current workers, even though many of them paid far less in taxes than they will receive in benefits under the current structure.
Even doing nothing about Social Security to avoid treating people unfairly is unfair, since the status quo is unsustainable, requiring future commitments to be broken in a major way. Even Social Security statements now communicate that there will soon be too little money to meet their benefit promises.
It is time we realized that there is no fair way out from government Social Security commitments that exceed the funds available. Current overpromises mean that everyone has a plausible fairness claim on their side, yet something must give. The closest we can come to being fair is to avoid making any new over-commitments, to search for ways to make the program more sustainable (to reduce future unfairness problems), and to look seriously at the contentious issue of which of the options will minimize the adverse impacts of unfairness that cannot be avoided altogether. Demonizing any real consideration of the various options, as some have already started doing, only increases the likelihood that there will ultimately be more unfairness than necessary.
It’s also important to recognize that the inherent unfairness we must soon address is not limited to Social Security. That problem comes in the wake of any ongoing government program that offers benefits in excess of costs to beneficiaries at the start, because in a world without free lunches, that requires future Americans to be saddled with the burden of paying for those excess benefits.
So “not fair” also applies not only to the introduction and past expansions of Social Security, but also to current attempts to sweeten the Social Security pot, as with the Social Security 2100 Act. It also applies to Medicare, Social Security’s 1965 offspring, which faces an even larger financing hole, since early recipients got far more benefits than they paid for (both because benefits have increased and because early recipients paid for at most a few years at lower tax rates than now, but got benefits for the rest of their lives).
The same unfairness applies to any government trust fund with unfunded liabilities, such as for the Highway Trust Fund, due to be fully depleted within the next dozen years. (Since benefits from the road work began long before much of the associated costs came due, the program leaves more costs than benefits for succeeding Americans.)
The national debt reflects similar benefits that have not been paid for, unfairly leaving the tab for a huge pile of not-even-remotely-justified government spending projects and policies to later generations (not to mention providing the leverage for further expanding not-yet-paid-for benefits every time the debt limit expansion provides a must-pass piece of legislation).
It is worth remembering that in many areas that have been put under government control, the word “unfair” is correct. But that is because unfairness is baked in from the beginning of such government programs.
We can now only choose among unfair options which will be unavoidably difficult and unpleasant, with a government that has shown very little interest in facing those sorts of problems. And the way to prevent further inherent unfairness problems is not by embracing policies that attempt to buy votes today by creating policies where people are disproportionately treated (debt forgiveness, anyone?). Unfortunately, there is an ever-present pile of policy proposals whose political attraction is just such disproportionate treatment, which justifies little optimism for solutions arising out of the beltway anytime soon.
Gary M. Galles
Gary M. Galles is a Professor of Economics at Pepperdine University and a member of the Foundation for Economic Education faculty network. In addition to his new book, Pathways to Policy Failures (2020), his books include Lines of Liberty (2016), Faulty Premises, Faulty Policies (2014), and Apostle of Peace (2013).
EDITORS NOTE: This FEE column is republished with permission. ©All rights reserved.
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