Acton Commentary

It Still Needs Fixing


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.