Committee for a Responsible Federal Budget

It Depends on What You Mean by 'Almost as Large'

May 26, 2011 | Social Security| Taxes

It seems like we are having Social Security deja vu. Just a couple weeks ago, we basically repeated our response from last September to those who criticize raising the retirement age.

Now, as we argued last September in a post titled "It Depends What You Mean by 'Equal'" after suggestions that the costs of both the upper-income tax cuts and Social Security shortfall were equal, we're again discussin claims that we could finance our Social Security shortfall by letting the upper income tax cuts expire at the end of 2012.

This suggestion comes out of a graph from the Center on Budget and Policy Priorities which shows that "the revenue loss just from extending the tax cuts for people making over $250,000 — the top 2 percent of Americans — would itself be almost as large as the Social Security shortfall over the 75-year period." (Note that while CBPP does not suggest this means one should be used to pay for the other, others have made this suggestion.)

CBPP makes this claim by taking the present value of Social Security's 75-year shortfall (0.8 percent of GDP) and comparing it to their present value projections of extending the upper income tax cuts over the next 75 years (0.7 percent of GDP).

Unfortunately, as we did last year, we think this methodology has a few flaws.

First, the measure of Social Security's 75-year shortfall includes the assets it currently holds in its trust funds. To be comparable to the cost of the tax cuts, it may be preferable to look at it's future shortfall. Viewed that way, we estimate an imbalance of about 1 percent of GDP rather than 0.8 percent.

Secondly, while present value matters, cash flow matters too. Attempting to replicate CBPP's methodology, we find that the Social Security (OASDI) shortfall exceeds the cost every year after 2020 -- quite substantially in most years. This is not reflected well in a present value estimate since it weights the earliest year (and the trust fund balance) most heavily. But looking at this chart, it is hard to argue that the costs are equal:

[chart:4374]

Third, even this chart may overstate the case somewhat. As we pointed out last year, "projecting forward the value of the tax cuts... appears to be highly sensitive to a few uncertain assumptions...tiny changes in some of the numbers they use can drastically alter this number." We haven't aimed to re-project the numbers, but here is what we projected the long-term costs of the upper-income tax cuts to be last year, under a variety of scenarios:

[chart:3111]

As you can see, our estimates from last September show that the difference between the cost of the tax cuts and the shortfalls could be even larger than shown in the top graph.

And finally, it is important to understand just what it takes to actually bring the fiscal situation under control. We face an enormous fiscal gap which would not be closed even if we let all the tax cuts expire and we make Social Security sustainably solvent. We're going to need a combination of Social Security reform, new revenue, discretionary spending cuts, and other mandatory cuts to even start to address this problem -- and ultimately that will have all been for nothing if we cannot slow the long-term growth of federal health spending.

Everything has to be on the table.