As I said in Part I, we have several options for improving the downstream solvency of the Social Security program. This assumes, of course, that we believe that this is a worthy goal.
Some deny that any problem exists. For these people, no action is necessary. Many of these people would not be directly impacted during their lifetimes, so for them, no problem exists. However, for those that believe they have at least some duty to future generations, some action must be taken to resolve eventual solvency problems.
I previously discussed the various feasible options (privatization, cutting benefits, raising retirement age, raising taxes, etc.), but I said that each of these options was difficult to implement. I surmised that no meaningful change would likely occur during the 110th Congress.
But why is change so difficult to achieve? Part of the reason for this is the dual nature of the Social Security system itself. It was sold to Americans both as a way to care for the elderly and disabled in our society AND as a retirement investment plan — a pooled investment plan.
Today we are all familiar with 401(k) plans, IRAs, and the like, where we each have an individual account. Back in the 1930s when the Social Security plan was formulated, very few had access to individual investment vehicles. Company pensions were more common, as was the case until a shift occurred about two decades ago. Americans understood the idea of paying into a pension plan that would provide a retirement payout.
For many Americans today, especially those that have entered the workforce in the last decade, this system where the individual is divorced from his/her personal investment seems antiquated and bizarre. Many in conservative circles tout the ideals of pure privatization and individualization of retirement planning.
However, this completely denies the other aspect of the system — the aspect that takes care of those that are less fortunate in our society. Some would very much like to divorce these two elements from each other. They would make retirement investment its own program, and make social care a separate program that is paid for out of the general revenue fund. This would expose the true cost of the social side of the equation.
This sounds reasonable, but splitting the program is not quite as easy as it sounds. What about provisions for the working poor — those that pay into a retirement system throughout their lives, but never generate sufficient to provide a decent retirement benefit? Do we really want to bear the societal costs of leaving a significant group of seniors in a more indigent situation than at present?
While liberals (increasingly joined by those that call themselves conservatives) have long touted the idea of reducing benefits “for those that can most afford it,” this changes the basic nature of the program’s contract as understood by most Americans. It changes the program more into a wealth transfer system.
Some have likened this concept to an insurance pool where benefits are paid only to those that need it, and others that paid premiums are simply happy to have been so fortunate as to not require receiving benefits. But most Americans that pay into Social Security think of it more like a life insurance/annuity policy. They pay a premium and expect a guaranteed payout. Most Americans don’t buy into limiting benefits because they see it as the breaking of a contract.
Reducing benefits also has a very real impact on productivity. As with all social programs, those at the margins are most impacted. I saw this happen when my father discontinued a productive and fulfilling electrical engineering contract because the net effect of the tax increase was very little take home pay. Of course, he didn’t discover this until he filed his income tax return, but it chagrined him that the government made his work essentially of no value.
Raising taxes on current producers to pay benefits to non-producers hardly seems equitable. After running up the tax rate for years, politicians realized that they had pretty much pushed it to its limit. Further increases will only further harm productivity, which may even reduce program revenues.
And it simply galls most Americans that the Social Security Trust Fund consists of government IOUs. The T-bills that represent the program’s funds are “investments” in the same way that giving yourself a loan is an investment. The interest paid on these bills at some point must come from the pockets of the taxpayers.
Social Security is a tough nut to crack because of the dual nature of its contract with the American people, and the way it is funded. No solution that fails to address all of these elements will resolve the program’s future solvency problems. Some of the solutions might push eventual insolvency further down the road a few years without really fixing it.
Our nation has a poor track record of seriously addressing problems until a crisis occurs. We’re not in crisis with Social Security, and we likely won’t be for at least several decades. However, we could resolve future problems now with far less pain than the next generation will face when the crisis looms large.
Will we do that? I would like to think that we would be insightful enough to do so, but due to the politically difficult nature of fixing the problems now, it doesn’t look like it will happen anytime soon.