Reuters Money

Would he or wouldn’t he?

President Obama’s deficit commission endorsed cutting Social Security benefits last month, and many wondered whether the president would endorse those cuts in his State of the Union message this week. Instead, the president reiterated the traditional Democratic position on Social Security in his address that he staked out as a candidate in 2008:

“We must [strengthen Social Security] without putting at risk current retirees, the most vulnerable, or people with disabilities; without slashing benefits for future generations; and without subjecting Americans’ guaranteed retirement income to the whims of the stock market.”

That rhetoric differs significantly from the “everything on the table” messages emanating from the White House since the National Commission on Fiscal Responsibility and Reform issued its final report. Written by commission co-chairmen Alan Simpson and Erskine Bowles, the report recommended benefit cuts via a higher retirement age, lower annual cost-of-living adjustments (COLA) and a third, somewhat technical change in the way benefits are calculated.

What happened in the weeks since the release of the commission report? A coalition of traditional Social Security backers and Democratic lawmakers seem to have convinced the White House to back away from the Simpson-Bowles recommendations. Their case had two main points — both correct:

1. Cutting benefits is bad policy.
That’s because Social Security has nothing to do with the federal deficit. The program ran a $2.5 trillion surplus in 2009, a number that will hit $3.8 trillion in 2020, according to the Economic Policy Institute. The surplus has been accumulating since implementation of the last Social Security reform measures in 1983, which were implemented for the purpose of building a cushion to fund the anticipated big wave of baby boomer retirements.

Social Security does have a long-term problem, in that the surplus will be depleted around 2035, absent any other changes. But that doesn’t mean the program is careening toward insolvency, as stated often by many pundits and elected officials. Even in 2035, Social Security would be able to fund 76 percent of promised benefits from current revenue.

The causes of this long-range imbalance also are misunderstood. Social Security cutters argue that the program can’t support the nation’s rising longevity rates; therefore we should boost the retirement age and work longer. But rising longevity accounts for only about one-fifth of the long-term problem, according to a new analysis by the Economic Policy Institute:

“The bigger problems are weak wage growth and rising earnings inequality, which account for more than half the projected shortfall that has emerged since the system was last restored to long-term balance in 1983. Earnings inequality has eroded Social Security’s taxable earnings because earnings above a cap are exempt from Social Security taxes. Likewise, slower wage growth increases the costs as a share of taxable earnings. Rising health care costs, which create a growing wedge between compensation and taxable wages, a falling birth rate, and higher disability take-up are also contributing to the projected shortfall.”

Advocates of benefit cuts further state that their changes would be grandfathered in so slowly that no current beneficiaries would feel the pain. But the proposed COLA changes would kick in as early as 2012, reducing the formula used to calculate the adjustment by about 0.3 percent less than it does now. That may not sound like a big change, but compounded over many years it would cut benefits significantly.

Social Security benefits are modest — average annual benefits are a bit under $15,000 per year. A better way to get the program back into long-term balance than cutting benefits is to lift the aforementioned cap on payroll subject to Social Security taxes, currently set at $106,800.

2. Cutting benefits is bad politics for Democrats — and for Republicans.
Numerous polls show remarkably strong opposition to cutting Social Security benefits across all political and demographic groups. A poll last year found that 77 percent of all adults agree that Social Security benefits shouldn’t be cut to reduce the federal deficit. The figure was 84 percent among Democrats, 78 percent among independents and 68 percent among Republicans.

Supporting Social Security is a near-religious issue for core Democratic constituencies that Obama and Congressional Democrats will need at their side in 2012. Yet a Rasmussen poll earlier this month showed that Republicans “hold a 10-point edge when it comes to voter trust on Social Security-related issues, 46 percent to 36 percent, up from a virtual tie last month.” Those numbers stem from the success Republicans had last year convincing seniors that the healthcare reform law will slash Medicare benefits. (It doesn’t). And it’s a stunning finding, considering that Obama rode into office two years ago being hailed as the heir to the legacy of Franklin Delano Roosevelt, who counted Social Security as a signature domestic achievement.

Advocates for protecting Social Security were cautiously optimistic that Obama’s position on Social Security is set following his State of the Union address.

“We’re not taking victory laps yet, but the speech was a positive step,” said Eric Kingson, co-director of Strengthen Social Security and a professor of social work at Syracuse University. “The White House has been under huge pressure from Wall Street, conservatives and deficit hawks to talk about cutting Social Security. The president didn’t do it.”

But pressure to cut Social Security hasn’t evaporated. Tough negotiations loom on the federal budget and the need to raise the government’s debt ceiling. Said Kingson: “Would the White House accept a deal with Republicans involving benefit cuts in that situation? I’m nervous about it.”