It Still Needs Fixing

March 26, 2008

Seemingly long forgotten in the fog of war, rising oil prices, and presidential primary campaigns is President Bush’s onetime pledge to reform social security. Unfortunately, that it is no longer a hot topic does not mean that the problem has disappeared. To the contrary, potential solutions only get more difficult to implement with each passing day.

The latest estimates from the trustees of the Social Security and Medicare funds predict expenditures of the former exceeding revenue in 2017. Granted that Medicare stands to become an even bigger problem than Social Security, health care reform is a topic for another day. Meanwhile old-age insurance presents a less difficult fix. “To the extent that changes are delayed or phased in gradually,” the trustees’ 2007 annual report says, “larger adjustments in scheduled benefits and revenues would be required that would be spread over fewer generations.” In other words, waiting won’t make it any easier.

Yet Social Security remains an obscure issue this election cycle. The only notable instance of attention it received was when Barack Obama elicited fleeting criticism for invoking the possibility of raising the income limit to which the tax applies.

The Democratic candidate deserves some praise for honesty. If no other structural change takes place, taxes will have to be raised. The trustees’ report estimates a need to increase the current 14 percent payroll tax to 16 percent and that’s just in the short-term. For a wage earner making $40,000 a year, it’s another $800 to Uncle Sam.

The economy-wide impact of such increases is not insignificant. The report observed that Social Security costs absorbed 4.2 percent of GDP in 2006 and will take 6.2 percent by 2030. To give some idea of what those numbers mean, two percent of 2007 GDP is approximately $276 billion—about the size of the entire pharmaceutical market in the United States, a sector that directly employs some 300,000 workers.

At the time Social Security was erected, there was at least arguable reason for it. Few elderly had private retirement plans and the cessation of work sometimes did mean impoverishment.

The situation has changed. Since 1969, the income of the elderly has grown at a much faster rate than the income of other age groups. The trend will only intensify as baby boomers retire. Over the last 15 years the median net worth of those aged 55-59 has increased 97 percent while the same measure for the 35-39 age group has declined by 28 percent. Yet the structure of Social Security has not adapted at all, remaining a welfare program for seniors funded by the wage taxes of younger Americans.

It is true that Social Security has come to represent a large portion of the income of most aged Americans. The effect of 70 years’ operation of the system, it will change if the incentives are modified. With improving longevity, too, the justification for complete retirement at age 65 weakens. Older people should be welcome to continue to contribute to their income by gainful employment if they wish, yet the current system promotes the opposite, enticing seniors to quit working altogether so as to maximize government payouts.

The current system has important social consequences as well. As Oskari Juurikkala’s recent analysis, Pensions, Population, and Prosperity, points out, increasing dependence on government pension plans has weakened the economic dimension of family bonds. Greater reliance on private retirement funds and family support will not only be more efficient and durable in the long run; it will have the added benefit of encouraging personal responsibility and intergenerational solidarity.

Naturally there remain poor older people who still require assistance and we must take seriously the moral obligation to support them that is incumbent on family, churches and other local organizations, and government—in that order. But the rationale for Social Security as it exists has vanished. The program lumbers on, undeterred, as government dinosaurs invariably do.

There is still time to temper the coming crisis by extending economic freedom to all Americans, permitting retirement savings to be held privately rather than in government “trust.” Some trade-off must be made. We can shift out of the government provision model, placing our dependence on private investment, families, and non-governmental organizations. Or future retirees can resign themselves to seriously diminished returns on what they pay into social security. Or we can maintain the current system unchanged by gradually raising taxes so as to aggravate the wealth disparity between young and old. Which will it be?

Kevin Schmiesing is a research fellow at the Acton Institute.

Comments

Mary Gibson: jollygib49@yahoo.com

In response to Fred Darnley, you might also explain to your children, if they are under age 18, that in the event you or your wife should die before they graduate from high school, that they will receive social security benefits until they are 18 or until they graduate from high school, as will the surviving spouse.

My first husband's father died when he was 10 & his brother was 6. His mother never remarried & worked part-time. His father left $10,000 worth of life insurance which was put into a CD. My mother-in-law, my husband, and his brother lived off the interest of the CD, their SS, and her part-time income. She felt it very important to be there for her children. They were poor, but she raised 2 very fine men.

When my husband & I had been married 4 years, his kidneys failed. Legislation had been passed only the year before to extend Medicare benefits to pay for kidney transplants and dialysis. Had that not happened, he would have died in 1974 instead of 1990. He was a dialysis patient for all those years, yet continued to work until he suffered a head injury in Aug., 1990 as the result of a car wreck. He died 13 days after the accident.

When he died, our sons were 13 and 8. As a result of his insurance & the SS that my sons & I received, I was able to do somewhat as my mother-in-law had done. It took a full year to settle all the health care expenses from his illness & then from the expenses incurred as a result of the accident. Having teenagers in the '90's to raise without their father was probably far more challenging than raising them in the '50's without their father. But, we made it through & I now have two very fine young men. One has worked in his job now for twelve years & is quite successful. He has been married for 9 years and has 3 daughters. The other is a marine. thank goodness for social security & medicare.

Personally, if I had my druthers, I'd choose for us the system that our wonderful legislatures have provided for themselves. Heaven knows that if they had the same as the rest of us, it would have been fixed many years ago.

As for Roosevelt, thank goodness for him. He brought this country back from some very hard times with his programs. So as you talk about him as a jack-ass icon, I've always heard that when you point a finger at someone, you have three pointing back at yourself.

DR. FRED DARNLEY: dredfarn@aol.com

The first question that each of my three children asked me upon receiving their first paycheck was: "Dad, what's FICA?". Answer: "its the program that provides your three grand parents some financial support. Its an ancient, outmoded system that requires you to pay money so that they can retire with some money coming in addition to their retirement funds. Its about taking care of them, somewhat, at this point." Response: "What about us and the money that we earned that was taken away?" Now there is the ultimate Social Security question, is it not? What about them - and my grandson? This ancient, Rooseveltian piece of social engineering has gone the way of other Stalinist concepts - the trash heap of history. And yet an entire political party is slavishly kowtowing to it daily - one of theirs was going around the country some eight years ago as a presidential candidate talking about some mysterious Lockbox - while the figurative Rome burns. Namely big chunks of my income, (for a few more years), and, proportionally bigger chunks of my childrens' income, are sacrificed on the altar of some concept that would have long since been canned as another Ponzi scheme were it to have occurred in the private sector, with each of the perpetrators being locked up in the Federal hoosegow forever. Its the good old duck test: if it quacks, waddles, etc. etc. etc. etc. like a duck, then .... I suppose that if Roosevelt had invented the Graf Zeppelin, we would all still be zooming around the world in lighter-than-air time bombs and everyone be forced to praise the fact that only thousands die each month as a result of minor glitches in the system. Or at least the news media and those folks whose icon is a jack ass.

In addition to the inherent financial travesty that this primordial piece of claptrap, Keystone cop social engineering represents, there is an equal and equally egregious loss of human skill, talent and wisdom inherent in this system of social engineering, as people are automatically deemed "antique and obsolete" at the ripe old age of 65 and summarily dismissed from the work force. Out. Finished. Washed up. Over the hill. Finito. Done. Retirement is not just an option for those who did well in their work and financial planning. It is a universal mandate. Those folks fortunate enough to reach that birthday are viewed as having no more value than the proverbial pocket in a shroud. In fact, they are worse than that - they are a drag on the national well being and would make things better if they would just shuttle off to their final reward in the sky. They are archaic reminders of unseemly times, (all that happened before), and only serve to stand in the way of those who know better.

In writing my first article published in a refereed journal, which dealt with adjustment to retirement, I discovered a startling fact when conducting the research for that paper: census data showed that everyone who could work, up until the advent of Social Security, did work. In other words, no matter the age, people continued to work until their deaths. There were no obsolete people, and, by all reports, much more respect shown the elderly. Not perfect certainly, but not all bad, either, especially if you are, say, 58 years old, and have to re-enter the job market. Good luck on that one - "Welcome to Wal-Mart", (who, by the way, have saved more elderly lives through their beneficence than Roosevelt every dreamed of). The point here is not an argument for the elimination of retirement - simply a request to rethink this antiquated, antediluvian system in order to bring it into at least the latter part of the 20th century, (aiming for the 21st century for folks with a jack ass icon is a bit unrealistic).

Build all the statues that you wish of Roosevelt, but let my children go, (and grandchildren). All you caring, loving folks with a jack ass icon.

Clare Krishan: Clare.krishan@comcast.net

oops! My bad, missing citation for grandchildren quote
www.marketwatch.com/news/story/investors-face-critical-juncture-financial/story.aspx?guid={22E814E7-51D9-430C-A955-89A3287BD009}&dist=TNMostRead

Clare Krishan: Clare.krishan@comcast.net

Seriously diminished returns aren't just a threat to socialized seniors:
Your remedy for "Greater reliance on private retirement funds and family support" may well suffer similar seriously diminished returns if our government continues to play with the capital markets and contribute to the continuing destruction of real purchasing power (see last eight years of the S&P Index valued in euros not greenbacks):
admin.minyanville.com/assets/FCK_Aug2007/Image/eurospx.jpg

from www.minyanville.com/articles/GS-S-dollar-euro-C-jpm/index/a/16331

Or as a Dow Jones MarketWatch column warns:
"These are the times our grandchildren will study, like we study the Great Depression, puzzling over the bizarre circumstances that came together to form this perfect storm."

You better trust that your children's socialization by your local education authority has instilled family support as a valid expression of America's freedoms, or else you may be thrown to the incinerators as soon as your marginal utility has been exhausted... a corpse's carbon credit in global warming terms may mark the end of the family's support...

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