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:
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.