A Modest Proposal to Fix Social Security

The annual report of the Social Security Board of Trustees on the long-term financial status of the Old-Age and Survivors Insurance and Disability Insurance Trust Funds released on March 31 showed that from 2034 Social Security won’t have enough money to pay all beneficiaries the amount they are entitled to.

There is no great mystery in how we got here. In 1978, the economist Paul Samuelson wrote: “[O]ur Social Security system is also an actuarially unfunded system” in that current payouts were funded by current receipts, or “Pay-As-You-Go.” That is how Ida Fuller, the first person to retire under Social Security, received over $20,000 in checks despite having made just $22 in contributions.

But Samuelson noted in the same column that:

…there is no obligation for this generation to have children at the same rate as did previous generations. Therefore, when those born during the baby-boom period of the ‘50s reach retirement age in the next century, their stipends will be felt as more of a burden by the thinner ranks of the then working population.

This is exactly what is happening. Falling birthrates and longer lives mean that from more than three workers supporting every beneficiary between 1974 and 2008 there will be just 2.3 by 2035.

What is to be done? One option is to do nothing and just let those 20% across the board cuts kick in. For all the political fuss about cuts to Social Security being the ‘third rail’ of American politics, those cuts are already coming.

Or we could raise taxes. The trustees’ report says that, to keep the program solvent for the next 75 years, taxes would have to immediately rise by 3.44 percentage points to 15.84%. Someone on the national median annual wage of $58,130 would see their Social Security payroll tax rise by 28% under these circumstances, by either $1,000 or $2,000 annually depending on whether you put the whole incidence of the tax on the workers, as evidence suggest you should.

Such harsh medicine has prompted a desperate search for alternatives. Yusuke Narita, an economics professor at Yale, claimed that, in Japan’s context at least, the “only solution” is mass suicide of the elderly, including ritual disembowelment.

Fortunately, there is a less gruesome solution. Remember, that in an “actuarially unfunded,” “Pay-As-You-Go” system, your contribution to its capacity to pay benefits out to you in the future isn’t the money you pay in today, that immediately gets paid out to some retiree, it is your contribution to the tax base of the future: your children, in other words. We could fix Social Security by making payouts dependent on how many children you have had.

This might strike some as unfair. But the generation now retiring is the one that voted for the politicians who passed across-the-board benefit increases of 7% (1965), 13% (1967), 15% (1969), 10% (1971), 20% (1972), and 11% (1974). In 1972, benefits were tied to the Consumer Price Index, yielding an annual “cost of living adjustment.” All this was at a time when, as Paul Samuelson was explaining, the capacity of the system to meet such commitments depended on “this generation [having] children at the same rate as did previous generations:” And they didn’t. The Boomers voted themselves ever higher Social Security benefits without having the children to pay for them.

And, since we’re talking about unfairness, how unfair would it be to hike taxes on today’s workers to fund commitments yesterday’s voters made to themselves years before those workers were born?

We have always known that a “Pay-As-You-Go” system depends on people having children at the same rate as previous generations. We have known since the Baby Boom bust in the 1960s that this was no longer a potential problem but an actual one. Today’s workers should not be required to cash checks written by their forebears.


READER COMMENTS

nobody.really
May 9 2023 at 4:41pm

[T]o keep the program solvent for the next 75 years, taxes would have to immediately rise by 3.44 percentage points to 15.84%. Someone on the national median annual wage of $58,130 would see their Social Security payroll tax rise by 28% under these circumstances….

I suspect John Phelan means that this increase would be required if we continue to rely on financing Social Security with a FICA (payroll) tax. I suspect that median wage earner would see a smaller tax increase if we financed Social Security with an income or wealth tax.

Thomas Hutcheson
May 10 2023 at 11:46am

Or a VAT.

robc
May 9 2023 at 6:32pm

I have an easier permanent fix based on a previous partial fix.  Up until people born in 1954, the retirement age was 66.  for 1955-1960, then added 2 months per birth year, until those born 1960 or later it is 67.

My solution…continue the trend.

 

So those born in 1966 would have a 68 retirement age.

1972 69.

1978 70.

1984 71.

1990 72.

1996 73.

2002 74.

2008 75.

2014 76.

2020 77.

2026 78, and so on.

I think it eventually solves the problem once and for all.

 

My SS full retirement age would by 68 and 6 months, or 18 months more than under the current system.  I am okay with that.

As those born in 1961 are 62 this year and eligible for early retirement, they might need to have a gap before initiating it, since they waited so long.  So start it with 1966 and back everything up one year from the chart above.

 

 

 

Thomas Hutcheson
May 9 2023 at 8:53pm

Just shift to a VAT for Social Security (and Medicare/Medicaid/ACA/ unemployment insurance/other safety net transfers like a CTC when enacted).  Consumption taxes are better than income taxes as they do not fall on savings) and rates are easier to adjust to keep revenues and benefits in rough balance.

Paul Sand
May 10 2023 at 6:56am

The Boomers voted themselves ever higher Social Security benefits without having the children to pay for them.

Quibble: In the mid-1960s to early 1970s timeframe you point to, the Boomers were pretty young, some not even of voting age. Those who were voting, I don’t think a lot of them were thinking about Social Security at the time (other than a drag on their paychecks), let alone using it as a single-issue voting guide.

But go ahead and blame the Boomers; we’re used to being blamed for stuff.

Walter Boggs
May 10 2023 at 11:20am

I won’t accept blame. My vote has no effect on the outcome of an election.

Capt. J Parker
May 10 2023 at 9:24am

This might strike some as unfair. But the generation now retiring is the one which voted for the politicians who passed across-the-board benefit increases of 7% (1965), 13% (1967), 15% (1969), 10% (1971), 20% (1972), and 11% (1974). In 1972, benefits were tied to the Consumer Price Index, yielding an annual ‘cost of living adjustment.’ All this was at a time when, as Paul Samuelson was explaining, the capacity of the system to meet such commitments depended on “this generation [having] children at the same rate as did previous generations:”

I truly love it when the our great American nobility, the governing classes and their gifted and educated “expert” enablers, put in motion a slow speed train wreck and then point fingers at the poor schmucks at the bottom of the food chain and say “don’t blame us, it’s what you peons voted for.”  And all this from the self-same “experts” that would also tell us that it’s economically illogical to spend time informing yourself about policy details and then voting for those advocating for policy that makes sense to you because the likelihood of  your vote making a difference is infinitesimally small.

It might strike some as unfair that I would lump together politicians, progressive academic economists such as Edwin Witte and market oriented economists like Mr. Phelan or Bryan Kaplan (Dr. Don’t Vote)  but those that sought careers in leading and educating the nation on economic policies are the ones who lead us here not the dupes in the voting booths.  Now, looking at the total mess the experts collectively created, those experts have nothing to offer other than blame shifting and facetious comments about ritual euthanasia.  Pfffft.

Steve Garskie
May 10 2023 at 12:40pm

Raise the ceiling for amount to be paid for full benefits incrementally.  A CEO , for example reaches their limit obligation in hours days or weeks, and pay nothing the rest of the year.

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