Krauthammer says the key thing to know is that the so-called "Social Security trust fund" consists of U.S. Treasury bonds. When, in order to pay benefits, the system has to cash those bonds to supplement the revenues being collected from current payrolls, the Treasury has three choices. These are (1) raise taxes, (2) borrow more money, or (3) print money. All three have negative consequences.
Raising taxes reduces spendable income and depresses the economy. Borrowing raises the already huge deficit and transfers the costs plus interest to our children and grandchildren. Printing money devalues the dollar and creates inflation; raising prices for everyone and destroying the value of people's savings. None of these approaches are popular.
There is, of course, a fourth choice, one available to Congress but not to the Treasury. Cut Social Security payments. This choice is generally believed to be political poison. Everybody knows that most old folks vote.
Payments can be cut by raising the retirement age, so retirees draw fewer years of payments. Payments also can be cut by adjusting less robustly for inflation, allowing the value of benefits to sink. Payments can be cut by means testing. All of these ways are indirect. Or payments can simply be made smaller. And any of these benefit cuts can be made to affect only future retirees, or include present ones.
It is a situation with few really good choices, and no popular ones. Politicians thinking about entitlement problems quickly begin to envision rocks and hard places, close together. Nevertheless, as Krauthammer says, the problem is solvable, albeit painfully.
