Ronald Reagan once quipped that he didn’t worry about the budget deficit, because it was “big enough to take care of itself.” On that theory we should be relieved to learn that the Congressional Budget Office is projecting a deficit larger than $1 trillion in 2020.
Five eminent Democratic economists have offered one interpretation of this report, under the headline: “A debt crisis is coming. But don’t blame entitlements.” Their actual argument is a little more nuanced than that: They want a “balanced approach” to deficit reduction rather than one that relies entirely on cuts in future spending on Medicare, Medicaid and Social Security.
Much of their case is reasonable. But here I want to focus on one sentence of the Democrats’ argument: “These widely popular programs are indeed large and projected to grow as a share of the economy, not because of increased generosity of benefits but because of the aging of the population and the increase in economywide health costs.” It’s a comment that glides over an important point that is not well understood.
The truth is that the increased generosity of Social Security benefits is an important contributor to our projected debt. Congress has not kept passing legislation to expand those benefits. But the program automatically expands benefits over time.
That’s because the size of the initial Social Security check that a retiree draws is tied to wage levels, not prices. Because wages have usually grown faster than prices, today’s retirees get bigger checks than yesterday’s, even when you adjust for inflation. Tomorrow’s retirees will likely get bigger checks still.
A medium-wage worker who retires this year will receive an annual benefit of $20,222. His equivalent in 2040 is projected to get $27,948 in today’s dollars. That’s a 38% increase, although of course Social Security’s actuaries may be wrong about how much wage growth will take place between now and then.