As I said to a friend yesterday, the more I read about Social Security the less I care. His response was I was in a very bad way for an econoblogger. And, while I mostly agree with that response, I still find myself caring less and less about the whole Social Security issue.
A lot of the present discussion is going back and forth in a sort of It’s Insurance! No, it isn’t! And, quite frankly, I think a lot of that is really beside the point. The real issue is sort of thorny, but it really boils down to the following: 1) Is there something wrong with the system? 2) If so, what exactly is the problem and why is it an issue? 3) What’s the cause? 4) How do we address it?
I don’t think anybody has been particularly honest up until this point. Well, that’s probably a bit unfair, what I really mean is that I don’t think anybody’s been straight forward enough. I’m going to attempt to outline what the issues are, as I see them.
1) Is there something wrong with the system?
In short, my answer is yes. It seems blatantly obvious that a system set up expressly to transfer wealth from a generally poorer demographic (the young) to a generally wealthier demographic (the old) is broken. I’m against transfers of wealth by government under the vast majority, if not all, circumstances, but particularly odious is taking money from the less wealthy and giving it to the more wealthy. And, as benefits are indexed to one’s wages, those who are least in need of the extra cash get the most. Now, that seems only fair as they paid the most in to the system, but it still seems counter-intuitive if the goal is to prevent old people from living in poverty. So, yes, I think there’s definitely something broken with the system, and that’s before even considering its financing.
2) What’s the problem, and why is it one?
Well, aside from the transfer issues mentioned above, at some point in the future Social Security will begin paying out more than it takes in from the Payroll Tax. I think that’s probably a big, big problem. The GOP has taken to calling it a “solvency crisis”, but I think that’s a bit of a misnomer.
The deal is, essentially, that the Payroll Tax has, since 1939 (making it pretty dishonest to blame Bush for this problem), been supporting general fund spending through the erroneously named Trust Fund. Sure, it’s got a lot of (non-saleable) US Treasury Bonds in it, but all government bonds are future tax liabilities. This hasn’t been an issue until now because there were always more people paying in than drawing benefits, and the liabilities could be deferred into the future indefinitely. As the population ages, and the worker-to-retiree ratio drops, it becomes impossible to continue that game. At some point Payroll Taxes will equal Social Security pay-outs, and at a point after that, pay-outs will exceed payroll taxes. Meaning that in order to meet the benefits currently promised in the system, Congress will have to start paying back the bonds in the Trust Fund. That money comes from the general fund, which gets its money from our good old friends the income tax and government borrowing.
The other major problem is that Social Security is both defined benefit and defined contribution. You pay a percentage of your income, and will recieve a pre-determined benefit based on the wage indexing that was instituted under Nixon. This is a problem because no matter how out-of-balance Social Security gets everyone is still promised a pre-set benefit.
If you think it’s easy to just cut other areas of general fund spending, there’s no reason to worry about this at all. Under any circumstances I don’t think it’s a particularly big worry that the Trust Fund will “run out”. Why? Because all that means is that Congress has paid back all of the bonds using general fund revenues…but by that point general fund spending will make up such a large part of Social Security benefits that it’s highly unlikely that Congress would simply stop paying them at that point.
If, like me, you think it’s damn difficult to cut government spending (especially as policy makers/lobbyists define “cut” as “reduce growth”), this whole Social Security imbalance becomes a nightmare. Unless changes are made, the massive weight of future Social Security benefits will force taxes to go up. A lot. We already have a massive government debt level looming in the future, which will undoubtedly cause taxes to go up (see cynicism regarding cutting spending above), so do we really want to add Social Security on to that? Do we want to do that especially knowing that this whole Medicare thing is going to cost at least a few limbs? My answer is no, and thusly we should do something to address the problem.
3) What’s the cause of the problem?
Well, unfortunately, there’s really not one cause: there are many. At the time the program was designed it was supposed to be a fund for widows and the extremely aged. Life expectancy was 63 and benefits started at 65. The program was expanded to cover everyone (increasing costs). In 1939 the Trust Fund was established to boost general fund revenues in the build-up to WWII, which converted us to a pay-as-you-go system (rather than pay-for-the-future). The 1970s saw wage-indexing come into effect, at the time it was designed to cut costs but in the long-run increased them. In 1983 the retirement age was raised to 67 for full benefits, at best a band-aid measure. All the while life expectancy was rising, and the number of retirees was going up. So our worker-to-retiree ratio is slowly, steadily declining.
All of these things contribute to what’s been dubbed the “solvency crisis”. I prefer to think of it as “damn, our ponzi scheme is falling apart”. Or, “Oh shit, we probably shouldn’t have spent all that money we could’ve saved for this!” Really, though, the problem boils down to the equal-opportunity profligate spending that Congress will do if given half a chance. Clinton’s balanced budget and/or surplus was the first since Andrew Jackson, so I’m hardly surprised that government spends with more gusto than a whole platoon of drunken sailors. So, really, the cause of the whole debacle is government’s complete and utter disregard for anything even in the neighborhood of fiscal responsibility.
4) How do we solve it?
Honestly, I don’t know. I think we start by deciding exactly what we want Social Security to be: is it savings, is it insurance, is it welfare? Currently it’s sort of this strange mish-mash of all three, and that’s not working. Tyler Cowen sees it as having a savings and welfare aspect.
If it’s welfare, then make it function like welfare. Fine, I don’t really support that kind of thing, but I’m used to the idea that other people do. Make it welfare if that’s what everybody wants it to be.
If it’s savings, make it bloody function like savings. This is what the whole personal account thing would do [they’re not private, the government still runs them] over the long run. You’d pay in X, it’d be put in some account with your name on it, when you retired you’d get the account balance. Not some weird thing indexed to your lifetime wages or the CPI, the balance of the account, maybe with the option to convert to an annuity. That’s savings, forced ones.
If it’s insurance, well, make it insurance. I wonder exactly what you’re supposed to be insuring against…outliving your savings perhaps? It seems odd to me to insure for retirement, I mean, in an ideal world P(Retire)=1, so it’s not exactly unpredictable. That’s why the only thing I can think of is that it’s supposed to be insurance against outliving one’s savings. In which case, fine, make it work that way. Only pay benefits to people who hit bankruptcy in their old age or something. I don’t have the answer, but it seems that paying out the insurance pay off to everyone regardless of whether or not they actually come to need it. If your house doesn’t burn down, you never get paid on the fire insurance. If you don’t run out of savings, you shouldn’t reap the benefit of…err…savings insurance.
Those questions are ones for the policy makers and people who are smarter than me. But, regardless of what’s decided, something will have to be done unless we want Social Security to become a major drain on the general fund and force future taxes even higher than they’re already likely to go.
