Acton Commentary

It's a Wonderful Retirement?


Its a Wonderful Life

How would life be different...?

In the movie It's a Wonderful Life, an angel shows a frustrated George Bailey how life would have been different if he had never lived. A similar thought experiment using the dysfunctional current Social Security system might be useful. How would life be different if we didn't have Social Security and it was newly proposed today in all of its glory? In a word, the idea would be rejected out-of-hand as ridiculous. The purpose of policy should be to serve the common good by permitting and encouraging individuals to provide for themselves and their families responsibly, and by enabling the poor and marginalized to reach a point where they are capable of doing the same. The current system fails on both counts.

Imagine if Senator Robyn Hood (R-AL) proposed a policy where a single parent with two children and an income at the poverty line would lose more than $2,400 to a new 12.4% tax. A household with $40,000 in income would lose nearly $5,000 and a household with $90,000 in income would lose more than $11,000. But under the Hood proposal, the amount of the tax would not increase any further for those earning more than $90,000 or so. Senator Hood would be condemned as a heartless oppressor of the poor and her proposal would be vilified as unspeakably unjust. Religious leaders would trumpet their concern for the poor and the oppressed--and would protest that the policy violated Biblical ideals of justice. Yet, this is the structure of taxation we tolerate at present with Social Security.

Imagine next that Representative David Ramsey (D-TN) wrote legislation to require lower-income and middle-income workers to save a significant proportion of their income--knowing that many people lack the discipline and foresight to voluntarily save enough money for their own retirement. (Upper-income workers would only be forced to save a smaller proportion of their income.) Also assume that Rep. Ramsey wanted to mandate that these savings would only be allowed to go into one investment vehicle--and that, with a puny 1% rate of return. A public policy analyst would surely point out that someone who works from ages 18-64 for 40 hours per week, earning only the minimum wage their entire career, and investing the same amount of money at a rate of return equal to the historical average of the stock market would have $600,000 (in current dollars) for a nest egg. Rep. Ramsey's legislation would be scorned because it made people work far harder than should be necessary to fund their own retirements. Yet, this is the promise of future benefits attributed to Social Security.

Imagine further that Representative Ima Grinch (D-PA) sponsored an amendment to the Ramsey legislation, proposing that those who died early would forfeit most or all of these “investments” savings to the government--unable, even, to bequeath that money to their heirs. There would be considerable protest as people pointed to the injustice of the government taking the money and adding insult to the injury of enduring the relatively early death of a family member. In addition, some public policy analyst would make the point that people in some groups tend to die relatively early--for example, African-Americans--and would note that this amendment would impose an especially harsh burden on them. Yet, this is the current arrangement under Social Security.

On top of all this, the current Social Security system is essentially a huge debt which is kept “off the books” as well as an unfunded pension plan-- ironic in an era when many policy makers profess such concern about government budget debt and “under-funded” pension plans in the private sector. Moreover, millions of state and local government employees have opted out of Social Security. But if Social Security is such a great idea, why would they choose (or be allowed) to opt out?

Why was Social Security ever attractive? There are at least two related answers. First, a “pay-as-you-go” system always works well for the first generation which participates. Instead of a standard retirement plan where workers finance their own retirements, Social Security transfers income from current workers to current retirees. For the first generation within such a system, retirees contribute relatively little and reap quite a bit by comparison. Once the system reaches “maturity,” it is likely to provide an unimpressive rate of return and is also vulnerable to demographic changes that alter the number of workers or retirees (as we see now).

Second, it is always difficult by nature to envision the long-term and subtle costs of public policy changes. So, it would have taken some imagination to foresee these problems when Social Security was instituted. It also follows that such policies are difficult to reform. Because politicians typically live for the short-term, there is little political gain to fixing a long-term problem and there is much to be gained politically in the short-term by attacking any brave soul who proposes a necessary change.

What now? The basic options are to tweak a bad system (change the retirement age, reduce benefits, or increase taxes) or to do something more substantive (some form of privatization and dealing with a thorny transition). If Social Security were a new proposal, the best approach would be to take it behind the proverbial barn and shoot it. But it's too late for that now. A long time ago, King Solomon warned “If you see the poor and oppressed in a district, and justice and rights denied, do not be surprised at such things.” (Ecclesiastes 5:8) While we shouldn't be surprised, we should work toward better public policy. Whatever the remedy, policymakers should address the oppressive taxes that Social Security imposes on the working poor, its pathetic rate of return, and inequities in its payouts.