Understanding Social Security’s Plight
The author of this post is J.D. Foster, the deputy chief economist at the U.S. Chamber of Commerce. This post was originally found on the Free Enterprise blog.
When I first began studying Social Security in the late 1980s I was met by Social Security experts with warnings about the system’s vast complexity. Every conversation was sprinkled with much hand wringing, head shaking, and no small dose of incoherent mumbling.
What I found, as I studied further, was that Social Security is complex in its details yet straightforward in its structure. Needless to say, the keepers of the flame were invariable nonplussed whenever I pointed this out. To be fair, if one’s focus is managing the existing system or smoothing the edges, Social Security is as complex as years of imperfect congressional tinkering can make it. But if one’s focus is understanding the big picture in the context of goals, design, and funding, then Social Security is not that hard to grasp.
A few years later I began studying Medicare and, guess what, was met again with the refrain about the program’s mind numbing complexity. Yet another self-appointed semi-religious order lapsed into mumbles of foreboding. What I found as I studied further was that the system is indeed intensely complex in its details. But, again, considered structurally the system is readily decodable, with the same distinction between the details a manager needs to know, and the issues and funding a designer needs to understand.
In one sense, Social Security’s financing problems are similar to those of public pensions across the states and the cities. As public choice theory reminds us, government has a bad tendency to promise big future benefits while levying current taxes inadequate to fund those benefits. Official oversight mechanisms designed and monitored by those who made the excessive promises and levied inadequate taxes are, not surprisingly, woefully inadequate.
The role of congressional incentives is brought into sharper relief by considering private pensions. Because it’s not their promises at issue Congress has been relatively vigorous ensuring private pensions are adequately funded and protected. Thus tighter funding rules are in place as well as an insurance system complete with premiums via the Pension Benefit Guarantee Corporation. Financing of the private pension system is far from perfect, but it’s a far sight better than most government pension systems, whether Social Security or for government worker.
What, then, is the problem? Social Security’s problem is that today’s benefits were promised to current and past generations without their paying enough for them. That’s not a moral or political judgment; it’s simple math. In contrast, future generations which at this time enjoy political influence only through the dreams, aspirations, and eye twinklings of their parents are projected to pay more into Social Security than they will receive.
That’s not so complicated, is it? Either benefits must be brought to align with revenues while preserving the safety net features of the system, or even higher taxes must be imposed on current and future workers to pay the benefits of retirees extant or soon-to-be.
Now, about those tots’ dreams and aspirations…
Interested in learning more about entitlement reform? Join us on September 24 for Entitlements: Why We Can't Wait.