Tuesday, December 12, 2006

Social Security Concerns (Part I)

When it comes to debating what to do with Social Security, it seems that the most vocal sides are out of touch with the American public. But it also seems that the most vocal sides are at least somewhat in touch with public opinion. What is going on here?

Let’s look the history of the Social Security program. The great savior FDR looked out upon his economically disadvantaged constituents, especially the elderly, and said, “Lo, here is a great inequity. Let us make a New Deal to ensure that the elderly and disabled in our nation have sufficient for their needs.”

But support for outright transfer of wealth was hard to be found, and thus, it was necessary to provide incentives to make the program seem good to income producers. And so it was sold as a self investment plan to bolster one’s own retirement. Only those that contributed for a given number of quarters would receive benefits, except that those disabled would also receive benefits. And it seemed good to the princes. And so it was written, and so it was done.

And all was good, for in the beginning there were more than 20 workers to support each non-worker, average life expectancy was less than retirement age, and the tax was only 2% (albeit, with a steady rise to 6% over a 14-year period that was eventually extended to a 24-year period).

But lo, and behold, soon cries of dismay were heard that there were yet other disadvantaged people that were not covered by Social Security. And soon the princes found it worthy to expand the program to cover these poor souls. And there was much rejoicing, especially among those that did not provide for themselves.

But the people did not produce posterity at the rate of their fathers, and with more souls covered by the program, the ratio of workers supporting non-workers fell, causing great dismay. But great fortune smiled upon the people insomuch that their increased productivity rate compensated much for these shortcomings.

Nevertheless, the princes saw fit to raise the tax rate repeatedly until it stood at 12.4%, and the benefit rate was reduced for those with earnings exceeding a basic amount. The retirement age was also raised to reflect an increased life expectancy. Thus there began to be those that had retired and could still work, but refused to do so because working garnered no net gain.

Then lo, a cry from the plan trustees that unless revamped the plan would go broke. But few wished to make any serious attempt to resolve the problem, preferring to leave it as an inheritance to their posterity. And thus the financial status of the plan languished.

And that’s where we are today, folks. Many proposals to save Social Security are bandied about, but nobody seems to be biting. There are even those that use all kinds of high-falutin’ statistical models to make believe that the system is not imperiled. But it is clear that the plan cannot survive simply by continuing with its present structure. Something must change.

But what do we change? President Bush offered to partially privatize the plan to make it more of an investment plan. This modest plan was rejected. Nancy Pelosi has promised that Democrats in the 110th Congress will staunchly oppose any privatization efforts. That leaves only a few options, all of which are untenable to one or more powerful groups.

We could raise the tax on wages. This disincentivizes productivity and income production from working. It’s a hard sell to the workers and businesses that would bear this burden. We could increase the retirement age to reflect the realities of our population’s increased productive life expectancy. Try to get that one past the powerful AARP lobby.

We could cap benefits, denying them to retirees that continue to work or that have been responsible enough to spend their working lives saving for retirement, because “they can afford it.” Never mind the amounts they paid into a system that was promoted to them as a retirement investment. Sure, it was, but for their neighbors rather than for themselves. We could also ignore the problem until it reaches critical mass a generation or so down the road. Now, there’s a great legacy to leave to our posterity.

The problem is that none of these possible solutions are politically palatable. The only one that even approaches political viability is the ostrich approach, where we hide our heads and pretend the problem doesn’t exist. I’m betting that this approach is most likely to be the one that is ultimately adopted by our politicians over the next two years.

I’ll write another post at some point down the road on why I think this is such a difficult problem to solve and how the roots of this problem impact almost all things political in our nation.


Jesse Harris said...

It's interesting to note that FDR was the same man who said: "In politics, nothing happens by accident. If it happens, you can bet it was planned that way." It makes you wonder if the system was setup to fail from the start, or perhaps if the original Social Security program was intended to be the first step on our march towards socialized government benefits for all.

You're right, though: nobody has the guts to make some tough and risky choices about how to solve this failure of a program. The only real fix is to kill it, but the AARP and political left won't have any of it, and the political right doesn't seem to be willing to reverse the process as gradually as it was hoist upon us. (I wrote at length about what I think the solution should be.)

There is simply no political will to acknowledge that a retirement system that's only a few shades away from a Ponzi scheme cannot sustain itself on the current course. It's going to take slashing benefits, raising the retirement age, diversifying beyond T-bills (the only legal investment vehicle for the "trust" fund), and a long phase-out.

We won't see any of these happening, however, because nobody wants to be the one holding the bag. Those currently collecting are trying to maintain the status quo for as long as they can so that it becomes someone else's problem. The near-retirement don't want to lose out on the money they've been paying for 30 or 40 years. The young don't count on it being there for them but aren't terribly concerned as to how the program disappears. The political left either refuses to even acknowledge a problem or stalwartly claims that we can fix it with only minor tweaks.

With all of these interests, there is little hope of steering the ship away from the rocky shores before a major catastrophe.

Scott Hinrichs said...

Jesse, thanks for your astute observations. I am trying to address actions that might have some political feasibilty. In your linked post you discuss killing Social Security completely. But you seem to suggest that we grandfather in those already collecting and those that are fairly close to collecting. I don't this plan would ever make it out of committee. In fact, I'd be surprised if a committee chair would even give it a hearing.

To grandfather in anyone, we'd have to continue to collect from current workers. While many in the younger generation do not count on SS being there when they retire, it's amazing to see how people's attitudes change as they get closer to the age for collection. You're not going to be able to sell a plan that keeps younger workers paying only to fund those that are no longer working.

Most of us want to help others, but there are limitations. There's got to be something in it for the producers. Rep. Craig Frank has an interesting post about redistricting that relates to this here. I also hope to address this a bit more in detail when I get around to doing part II of this series.

Charles D said...

There are a few basic facts that are not in evidence here:

1) According to the numbers President Bush is using, Social Security can pay all promised benefits for the next 37 years without any changes at all. Even if nothing were done by 2043, the program would still pay a higher real (adjusted for inflation) benefit than what people receive today.

2) In 37 years, the program will experience a temporary minor shortfall due to the baby boomer retirements. It will only last 20 years or so.

3) The entire shortfall such as it is could be removed by simply raising or removing the cap on the payroll tax currently over $90,000.

I would suggest you get some more realistic analysis. Try the Center for Economic and Policy Research which has done a great deal of work on the subject. Then you might want to turn your attention to some of the real crises facing this country.

Scott Hinrichs said...

DL, thanks for the link. I've checked out many different analyses from a broad range of sources. Many of them include intricate statistical and financial analysis. One thing I can say for absolute certain is that there is extremely broad disagreement among the conclusions of these very smart people and think tanks.

All of these analyses rely on guesses of certain factors. A few of these guesses are bizarre, but most of them seem quite reasonable. The upshot is that reasonable and smart people can disagree about what they think will happen with Social Security over the next century. However, most analyses agree that the program cannot survive past 50-100 years from now without major changes. We can work on making changes calculated to improve the program now, or we can leave it to future generations to solve.

Charles D said...

I beg to disagree. The Social Security program does not face a survival threat (except perhaps a political one). There will be a period of time in the 30-50 year horizon when it will be unable to pay ALL the benefits at the currently prescribed levels, but it will still be able to pay something like 70% or more of what is now considered normal.

What is not being seriously considered by the "fix Social Security now" crowd is raising the salary cap. If we tripled the cap (calling for contributions on the first $270,000 of income), the additional revenue (including interest earned over the next 30 years) would almost entirely eliminate the hiccup expected.

When I hear politicians and think tanks talking about the "crisis" in Social Security and the need to "fix" it immediately, I know that these are people more interested in privatizing or eliminating the program than in saving it.