Social Security Reform

The president has made reforming Social Security the priority of his second term. His reform proposal would be to totally overhaul the system, all the way down to its philosophical core. Is such a radical overhaul really necessary?

The problem is fairly simple. Benefits are paid out from a trust fund into which all American workers pay a tax on their paychecks. Today, as has been true since the program was created, the rate at which money is coming into the trust fund through that payroll tax exceeds the rate at which money is going out of the trust fund through benefits. This means the trust fund is growing. However, as the baby boomers begin retiring in the next ten to fifteen years, the rate at which money is taken out of the fund will dramatically increase and, according to estimates on which everyone seems to agree, around 2018 the payout rate will exceed income, and the fund will begin to shrink. Finally, around 2042 the fund's value will fall to zero.

From what I've read on the subject, everyone seems to agree on this statement of the problem. The differences come in solution. The president's approach is to radically redefine Social Security. In the current model, today's workers pay money into the fund to provide the benefits paid out to previous generations of workers now in retirement. So, I am paying for my grandparents and parents, my kids will pay for my parents and me, my grandkids will pay for me and my kids, etc. In the president's solution, this basic picture would be totally changed. I would put money into an account similar to an IRA, and at retirement draw money from this account. In this picture, the worker is ultimately paying for himself.

Do we really need a radical solution of any kind? If we agree to keep the current model, then any solution is a matter of tinkering with both the rate at which money is coming into the trust fund, and at which money is paid out. Basically we want to move the transition point, currently estimated to arrive in 2018, where the rate at which money coming into the fund falls below the rate at which money is paid out. How can this be accomplished? Raising the retirement age would keep older workers paying into the system longer, increasing the rate at which money comes in, and reduce the amount of time they are drawing benefits, decreasing the rate at which money is paid out. That simple solution should extend the life of Social Security quite a bit. And it makes sense. People are living longer today and are healthier in their later years than they were in previous generations. A retirement age set at 65 or 67 just doesn't make sense anymore. Many of these seniors want to keep working.

Cynthia Tucker writes of another simple solution:

Even that crisis of diminished benefits (which won't kick in until the Bush twins are nearly old enough to collect Social Security themselves) could be headed off with a modest increase in the payroll tax, which is currently quite regressive, costing people who earn less a higher percentage of their incomes. As of 2005, workers pay the payroll tax on every dollar of their income up until $90,000. If the tax were increased to the first $100,000 or $110,000 of income, which would not touch average workers, Social Security could pay full benefits well into the distant future.

There are plenty of proposals I have read about, including means testing for beneficiaries (i.e. not providing benefits to wealthy retirees).

Now, there is a key point about all of these simple solutions. They are not permanent. Adjusting the retirement age or increasing the maximum income subject to payroll tax will move the transition point to a later date, but that point will still exist. This means these solutions must be constantly revisited and recalibrated. The president's goal, as stated in the State of the Union, is to "pass reforms that solve the financial problems of Social Security once and for all" (emphasis mine). The president later stated his guidelines more completely, saying

We must, however, be guided by some basic principles. We must make Social Security permanently sound, not leave that task for another day. We must not jeopardize our economic strength by increasing payroll taxes. We must ensure that lower income Americans get the help they need to have dignity and peace of mind in their retirement. We must guarantee that there is no change for those now retired or nearing retirement. And we must take care that any changes in the system are gradual, so younger workers have years to prepare and plan for their future.

As we fix Social Security, we also have the responsibility to make the system a better deal for younger workers. And the best way to reach that goal is through voluntary personal retirement accounts. Here is how the idea works. Right now, a set portion of the money you earn is taken out of your paycheck to pay for the Social Security benefits of today's retirees. If you are a younger worker, I believe you should be able to set aside part of that money in your own retirement account, so you can build a nest egg for your own future.

This is really the heart of the debate. If one wants to keep the current basic concept of Social Security in place, then simpler, shorter term solutions are all that is required; such a system can never be made permanently solvent. If, on other hand, one envisions a radically different conception of Social Security, as the president does, then equally radical reforms are required.

David Shribman characterizes this philosophical debate as "personal freedom vs. collective responsibility." The current model is built on the idea of collective responsibility, i.e. the belief that our society has a general obligation to care for and support the elderly and infirmed. We readily recognize this principle underlying much of the New Deal and Great Society programs championed by the liberals. The president's approach is built on the idea of each person taking care of himself, which we readily recognize underlying much of the conservative's social concepts. So, this debate on social security reform is more fundamentally a debate between conservative and liberal ideologies.

Regardless of one's philosophical preference, the cost issues raised by the president's radical reform are daunting and ultimately preclude such an approach. Benefits will continue to be paid out to those already receiving them, and to those approaching retirement, who will therefore have little time to put money into their private accounts. Yet no money will be coming in to pay for those benefits, leaving a massive deficit that would have to be covered by borrowing, increasing the budget deficit and the national debt. Clearly, this is not a good idea.