Enjoy the Social Security Bump Now. You'll Pay Later.

Or maybe next decade, when coming face-to-face with the shortfall, politicians will finally address Social Security finances and either cut benefits or increase the payroll tax — or most likely, some combination of the two.

But no matter what happens, there is a cost to waiting. The Social Security Administration estimates that benefit cuts and tax increases would be smaller if the problem were addressed sooner rather than later because more generations can share the cost. Running up debt or increasing taxes may also not be so easy in another 10 years.

Democrats favor increasing taxes on the people who earn more than $250,000, but the tax increases that would be necessary are large. It would take at least a 12.4 percentage point increase in marginal tax rates on higher earners. That doesn’t leave much room to finance any other spending programs.

The U.S. government is already facing large unfunded debts. Entitlement obligations like Social Security (which aren’t counted as debt), add another $112 trillion over the next 30 years, and it’s even more expensive than normal debt because, as we saw this week, it’s indexed to inflation.

Inflation, Rates & Other Issues

One of the few benefits of high inflation is that it’s good for debtors because inflation erodes the value of debt. But both Social Security and Medicare’s cost rise with inflation (in Medicare’s case health inflation), which means even less fiscal room not only to finance entitlements, but any other programs.

When interest rates and inflation were low, it seemed politicians had all the time in the world to deal with entitlements. Now politicians who chose to ignore Social Security’s financing issues appear to be banking on a return to low rates and negligible inflation.

Anyone who is concerned about entitlements and debt has been screaming into the wind for decades. But as the current environment has shown, the future is uncertain.

The same people who dismissed inflation also don’t think the U.S. government will ever face constraints on its borrowing. The inflation adjustment this week should act as a warning that this is a serious risk, and now is the time to deal with it.

***

Allison Schrager is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.”