Penn Wharton's Smetters Warns a Budget Rule Could Let Congress Make Social Security Look Fixed Without Fixing It

A budget expert says a quirk in federal scoring rules could hide the true price of one tempting fix for Social Security. Fox Business spoke with Kent Smetters, faculty director of the Penn Wharton Budget Model, about a new report.

The law. Social Security is expected to reach insolvency in about six or seven years. Smetters says current law requires benefits to be cut to match what monthly payroll taxes bring in once the trust fund is depleted. He estimates that at about a 15 percent reduction, applying to new and existing beneficiaries alike. The Congressional Budget Office projects the main trust fund will run out in 2032, while Penn Wharton puts it at 2033.

The rule. A separate law governs how the CBO scores the cost of covering the shortfall with general revenue transfers. Under it, the transfers appear to cost nothing, even though the borrowing behind them would be large. Smetters puts it at almost 200 percent of GDP over 75 years. "That's just like the left hand paying the right hand," he said.

The warning. He fears policymakers will see the transfers as "the easy button for looking like they've solved Social Security." He also says relying on general revenue could alarm bond markets and push interest rates up, and he calls it the "ultimate sign that we've given up."

The options. Smetters says there is still time and there are choices. The Penn Wharton site lays out seven illustrative paths, ranging from heavy tax increases to heavy benefit cuts, with a middle ground between them. He pointed to the 1980s deal between President Reagan and House Speaker Tip O'Neill as an example of both parties setting politics aside, and said "we just don't have that rhetoric right now."

Note: the 15 percent figure and the 200 percent of GDP figure are Smetters' estimates and come from Penn Wharton's model, which is not the CBO's.