The Social Security countdown clock just got louder. (See the video I did on this here.)
We are rapidly approaching the point where Social Security’s finances will force Congress to act. Under current law, if lawmakers do nothing, Social Security benefits would face an automatic across-the-board reduction once the program can no longer pay scheduled benefits in full.
And that’s the part of this debate that drives me nuts.
People talk about these future benefit cuts as if they’re inevitable.
They’re not.
Congress can change the law.
Social Security Isn’t Going to Suddenly “Run Out of Money”
Under current law, Social Security can only pay benefits from the revenue and assets legally available to the program.
When those resources are no longer sufficient to pay 100% of scheduled benefits, benefits would have to be reduced.
That’s obviously a serious problem.
But here’s what gets overlooked:
The benefit reduction happens because the law says it happens.
Congress writes the law.
Congress can change the law.
We’ve seen Congress do exactly this with taxes.
Remember the Tax Cuts and Jobs Act of 2017? Many of its individual tax provisions were scheduled to expire. If Congress hadn’t acted, millions of Americans would have faced higher taxes.
What happened?
Congress changed the law.
The same basic principle applies to Social Security.
If current law requires benefits to fall when the trust fund becomes depleted, Congress can pass a new law allowing those benefits to continue.
The real question isn’t whether Congress can prevent the cuts.
It can.
The question is how those benefits would be financed.
“But That Would Increase the National Debt!”
That’s usually the next objection.
If the government borrows money to maintain Social Security benefits, federal debt would increase.
True.
But we need some historical perspective.
In 1937, the United States had roughly $36 billion in federal debt.
By the end of the Reagan era, federal debt had climbed into the trillions.
Today we’re talking about tens of trillions.
Yet throughout that entire period, people repeatedly warned that increasing federal debt would eventually bankrupt the United States.
It hasn’t happened.
That doesn’t mean debt is irrelevant.
It doesn’t mean the government can borrow an unlimited amount of money forever without consequences.
And it certainly doesn’t mean fiscal policy doesn’t matter.
It means something much narrower:
The absolute size of the national debt doesn’t tell us whether the United States is about to go bankrupt.
What matters far more is the government’s ability to service that debt relative to the size and productive capacity of the economy.
We’ve even lived through periods when interest rates were dramatically higher than they are today.
In the early 1980s, Treasury yields reached extraordinary levels. Old government debt matured and had to be refinanced at those higher rates.
The government didn’t default.
It refinanced the debt and kept operating.
“Okay, But Won’t That Create Massive Inflation?”
This is where the argument gets more interesting.
One of the most common assumptions goes something like this:
More government borrowing = more money = more inflation.
But the relationship isn’t nearly that simple.
Look at the growth of M2—the broad money supply—in different countries.
Since the mid-1990s, China’s M2 increased vastly more than America’s.
If enormous increases in M2 automatically translated into enormous increases in consumer prices, China’s inflation should have dwarfed inflation in the United States.
It didn’t.
Japan gives us another interesting example.
Japan spent decades experimenting with extremely aggressive monetary policies while simultaneously struggling with very low inflation and, at times, outright deflation.
Meanwhile, America’s relationship between M2 and CPI has looked very different.
The lesson isn’t that money supply doesn’t matter.
Of course it matters.
The lesson is that you can’t look at M2 by itself and automatically predict future inflation.
Money creation, lending, velocity, production, demographics, demand, supply constraints, fiscal policy and monetary policy all interact.
That’s why pointing at a chart of M2 and yelling “inflation!” isn’t enough.
What About Turkey, Iran and Zimbabwe?
Whenever I make this argument, someone inevitably brings up countries such as Turkey, Iran or Zimbabwe.
And yes, countries can absolutely destroy their currencies.
Massive monetary expansion can accompany—and contribute to—massive inflation.
Nobody is arguing otherwise.
But saying the United States could deliberately finance a Social Security shortfall does not mean advocating unlimited money creation.
Those are completely different propositions.
There’s an enormous difference between saying:
“Congress can finance Social Security benefits.”
and saying:
“Print unlimited amounts of money forever.”
The second argument is a straw man.
The legitimate debate is over how much additional financing the U.S. economy could absorb, what form that financing should take, and what the inflationary and fiscal consequences would actually be.
Those are questions worth debating.
Social Security Is NOT Your 401(k)
There’s another proposal that comes up constantly:
Why not let workers invest part of their Social Security contributions in low-cost index funds, similar to the federal government’s Thrift Savings Plan?
Because that misunderstands what Social Security is supposed to do.
The TSP is essentially a retirement investment account.
A 401(k) is an investment account.
An IRA is an investment account.
Social Security is social insurance.
Those are fundamentally different things.
Your investment portfolio gives you ownership of financial assets and the potential for long-term growth.
Social Security provides something your investment portfolio cannot guarantee:
Income you cannot outlive.
That’s the entire point.
Your 401(k) might perform wonderfully.
It might perform poorly.
You might withdraw too much.
You might panic during a bear market.
You might live to 105.
Social Security addresses a different risk: the possibility that you live much longer than your personal financial assets can support.
That’s why I don’t want Social Security turned into another investment account.
We already have investment accounts.
Keep the two separate.
The Social Security Problem Is Fixable
None of this means we should ignore Social Security’s finances.
Quite the opposite.
The closer we get to trust-fund depletion, the more disruptive the political debate becomes.
Congress has plenty of options.
It can raise taxes.
It can change the taxable wage base.
It can change benefits.
It can alter retirement ages.
It can change how benefits are taxed.
It can borrow.
Or lawmakers can combine several approaches.
But there’s another possibility people rarely seem willing to discuss:
Congress can simply change the financing rules so scheduled Social Security benefits continue to be paid.
Would that potentially increase federal borrowing?
Yes.
Does that automatically mean the United States goes bankrupt?
No.
Does it automatically mean hyperinflation?
No.
And if someone says it inevitably leads to massive inflation, I want to see the evidence.
Not Zimbabwe.
Not Iran.
Not a country experiencing currency collapse or political instability.
Show me why maintaining Social Security benefits in the world’s largest economy necessarily produces runaway inflation.
That’s the debate we should actually be having.
Social Security and Your Investments Have Different Jobs
This is the point I think gets lost in almost every Social Security debate.
Retirement planning works better when different assets have different jobs.
Your stocks provide long-term growth.
Your bonds and cash provide stability and liquidity.
Your retirement accounts give you ownership of financial assets.
And Social Security provides lifetime income.
Social Security is insurance. Your 401(k) is an investment.
We shouldn’t destroy one trying to turn it into the other.
The Social Security countdown clock really is ticking.
But that doesn’t mean a massive benefit cut is inevitable.
It means Congress eventually has to make a decision.
And sometimes the simplest solution is the one nobody seems willing to talk about:
Change the law.