Social Security May Be the Lever That the Big O Needs

As a long time watcher of Social Security I was shocked (yes, shocked) at the recent Congressional Budget Office (CBO) report on America’s largest entitlement program. CBO concluded that the long term outlook for SS deteriorated substantially over the last twelve month.

CBO revised its assumptions regarding mortality. This is a huge variables for SS. With people living longer, they will receive more checks; this eats into the solvency of SS over a long-term period.

CBO concluded that one option to ‘balance’ the solvency of SS required an “Immediately and Permanent” payroll tax increase of 3.4% (Wow!). A year earlier, CBO stated that a payroll tax increase of 1.9% was required to balance SS. The change in the tax increase required is 70% higher than that reported just a year ago!

SS’s taxable payroll is equal to 36.3% of GDP. That comes to $5.8 Trillion for 2013. A 3.4% tax increase translates to approximately $200 Bn! A tax increase of this magnitude would absolutely sink the economy. There is no chance in hell that anything like that could (or should) happen. However, there are a variety of other alternatives to tweak SS that would not have the negative consequences of such a big tax increase.

Were it not for the fact that the country is managing its finances on a month to month basis, the rapidly growing problems at SS would be high on the list of problems that need attention. Clearly, the White House has read the CBO report. I wonder if the WH will use the deteriorating condition of SS as its “lever” in negotiating with Republicans over the budget and the debt limit.

Would Obama throw SS under the bus to achieve an extension of the debt limit and an end to the shutdown? Of course he would. Some things that might happen as part of a ‘big deal’ to buy a resolution of the immediate crisis(s):

I) Raise the cap on taxable earning- liberals love this.

II) Raise the retirement age – Obama has already pushed for this.

III) Means test SS retirement benefits – Republicans wanted this for Medicare.

IV) Change the COLA inflation adjustment. Liberals hate this, Republicans want it, Obama has pushed for it.

If all four of these steps were adopted, it would have near Zero consequence to the economy for the next three years (all changes would be phased in). Obama would love that outcome.

What’s the most important thing for Obama? To end the debate over ACA. Would he trade ObamaCare for big changes to SS? In a New York minute.

As near as I can tell, there is currently no basis for a resolution to the budget impasse, and it looks like we are headed off the cliff on the debt limit. Something has to give. SS may be the lever that the Big O needs for a deal that saves his presidency. The Tea Party folks in the House will not vote for anything that allows ACA to continue, but there are a fair number of moderate Republicans who would trade SS for ACA. Nancy Pelosi (D-CA) would puke at this result, so would Harry Reid (D-NV. But if they apposed a deal, then they would be the ones responsible for a national default (Republicans would love this outcome).

Would Obama push his pals off a cliff to get a deal? The answer is that he has no other viable options.

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About Bruce Krasting 208 Articles

Bruce worked on Wall Street for twenty five years, he has been writing for the professional press for the last five years and has been on the Fox Business channel several times as a guest describing his written work.

From 1990-1995 he ran a private hedge fund in Greenwich Ct. called Falconer Limited. Investments were driven by macro developments. He closed the fund and retired in 1995. Bruce also been employed by Drexel Burnham Lambert, Citicorp, Credit Suisse and Irving Trust Corp.

Bruce holds a bachelor's degree in economics from Ithaca College and currently lives in Westchester, NY.

Visit: Bruce Krasting's Blog

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