Dan Lee: Bipartisan solution to address Social Security now less likely

In his state of the union address, President Biden delivered a broadside against "some Republicans" who have raised the possibility of reducing Social Security and Medicare benefits. Sen. Rick Scott of Florida, who proposed a "sunset law" that would require all federal programs to be reevaluated every five years, was a key Republican in the crosshairs.

Sen. Scott's sunset law proposal is sheer nonsense, at least with respect to Social Security and Medicare. Suppose, for example, that Deere & Co. adopted a policy of reevaluating retirees' pensions every five years prior to making a decision as to whether they should continue to be funded. That would be appalling! There's no way that Deere & Co., a company with high ethical standards, would do that. Neither should the federal government or any other level of government.

Sen. Scott, it should be added, has backed off from his controversial proposal and now says that Social Security and Medicare should be exempted from his sunset proposal.

The damage, however, has been done and when President Biden delivered a scathing broadside against Sen. Scott's proposal, he made a bad situation worse by politicizing Social Security and Medicare. While that might be politically expedient, it makes it far more difficult to address the funding problems related to Social Security and Medicare – problems which require a bipartisan approach if they are to be resolved.

(Because of space limitations, I will set aside the Medicare part of the equation and focus attention on the funding problems related to Social Security, reserving discussion of the Medicare funding problems for a subsequent column.)

A bit of history is in order here. As established by the Social Security Act of 1935, Social Security was intended to be a mandatory savings program for retirement. The Social Security Act of 1939, however, changed that. As a result of this act, Social Security became a pass-through program with the benefits for retirees financed by a tax on current workers (which is part of the FICA deduction that shows up on the stub of our paychecks), a system that continues to be in effect today.

An implicit promise accompanied this fundamental change — namely if taxes on current workers financed benefits for those who were retired, those working when these workers retired would finance the benefits for them.

The revenues generated by the payroll tax are channeled through the Social Security trust fund, the official name of which is the "Old-Age and Survivors Insurance (OASI) Trust Fund." It is from this trust fund that benefits for current Social Security recipients are paid.

All of this is fine, except there is a huge problem coming down the tracks at us like a train out of control: the cost of the benefits currently being paid exceeds the revenues generated by the Social Security payroll tax, drawing down the temporary surplus in the trust fund.

Federal law requires that each year, the trustees of the fund issue a report indicating the actuarial status of the fund and when the temporary surplus will be depleted. The most recent report, which was released last June, projects that the temporary surplus in the fund will be depleted by 2035, at which time the revenues coming in from the payroll tax will only be sufficient to pay about 80 percent of scheduled benefits.

When that happens, there will basically be three options:

Cut scheduled benefits by 20%.Raise the payroll tax or other taxes to generate sufficient revenues to pay all of the benefits that retirees have been promised.Cover the shortfall by running up the national debt.

None of these are likely to be popular options.

This is not the first time that the Social Security system has faced a funding crisis. A similar crisis arose in the early 1980s. A special bipartisan commission was appointed by Congress and President Ronald Reagan, a commission that was officially named the National Commission on Social Security Reform, but informally became known as the Greenspan Commission because it was chaired by economist Alan Greenspan. The commission made several recommendations to shore up the Social Security System, most of which became law.

The time has come for another Greenspan Commission. Unfortunately President Biden's heated rhetoric about Social Security makes it far more difficult to get the bipartisan support necessary to form such a commission.

President Biden's politicizing Social Security and Medicare might well go down in history as his greatest blunder.