The extra Social Security money that was collected in the past was spent in the past and used to offset lower income taxes, and in a decade or less there will be no extra Social Security money. After that point, if currently promised benefits are to be paid, taxes will have to rise and/or federal services and benefits will have to be cut. Or should I say, cut by even more than will have to be the case in any event, as we have been living beyond our means, and running federal deficits, over and above the additional payroll taxes theoretically owed to Social Security. Given that, what are our elected officials likely to do? I see four likely scenarios, each of which involves offsetting the benefit older generations have gotten by spending the extra payroll tax collections over the past 24 years with pain for future generations down the line. The only difference is in the details, and they way that pain would be disguised as an “everybody wins” solution.
In the short run, our elected officials are likely to do nothing. As long as they can keep pretending future benefits will be paid, they can justify collecting more in regressive payroll taxes than is required to pay current beneficiaries, and current beneficiaries can continue collecting benefits at current levels. In the private sector, the generation now in charge is the one that imposed multi-tier contracts, with lower wages and benefits for younger workers, on a huge share of the workforce over the past 25 years. Their solution for Social Security is likely to be similar, and the longer any changes are put off, the more people get on the first class train before it leaves the station.
For a few years after they can no longer continue to borrow from Social Security, in fact, our elected officials and the generations they represent may even try borrowing from others to pay Social Security, until a crisis hits. Ideally, from their point of view, they would go on paying current levels of benefits without raising taxes until the “trust fund” was exhausted. The federal government would, in this scenario, pay back the “trust fund” by borrowing more and more money from outside the government, until a huge share of tax revenues are going to debt service, taxes were soaring, and other benefits and services were being gutted. At that point, with the “trust” fund gone, Social Security benefits would have to be slashed by about one quarter in theory. In practice, thanks to the need to pay back all those debts, the government would be bankrupt and worse would be required, but those responsible would be long gone. (And I would be 78 years old).
The only alternative on offer today is privatization, favored by President Bush, under which a portion of Social Security taxes would be diverted to private accounts. Of course the amount diverted would be much greater for the affluent than for the middle class and working poor, and the diversion would leave even less money going into Social Security. The idea is that if investment returns in the private accounts of the affluent were high enough, they might, maybe, perhaps, if things go really well, earn enough for the affluent to get the benefits they were already promised (and already paid for) to begin with. But probably not, particularly because at this point just about every asset (stocks, bonds, real estate) is overvalued, on a historical basis, relative to the income it generates. (Or they were at the time I wrote this; a return to reality may be in the offing by the time you read this). Assets are today valued, it seems, on the assumption a greater fool will come along to buy later. And who is the greatest fool? In this case it would be Social Security.
And in any event, the diversion would leave the federal program with even less money to do what the government really needs to do — provide a minimum guarantee of decency in old age, especially for those with nothing other than Social Security to look forward to. With private accounts, even if there is a guarantee of a minimum benefit for the poor, the middle class would certainly not have enough diverted funds in those accounts to assure they would not become poor themselves. Under no circumstances could they be made whole. We already have private accounts for those with the income to support them, and who want save now to retire sooner and/or live better in retirement. They are known as IRAs and 401Ks. That’s not what Social Security is for. President Bush’s plan is DOA because no one in older generations is willing to face the fact that younger generations will not be getting the full benefits they were promised. It should have been DOA for more substantive reasons.
If one looks beyond the realm of paper assets and thinks solely about the tangible economy, in fact, one comes to doubt if any such paper assets, whether government or corporate, can assure retirement. Those paper assets are claims on future goods and services, to be produced by someone else. What happens if there are more people not working and producing anything, but holding such paper claims, and fewer people working and producing goods and services? Then it will take more paper claims to purchase the same amount of goods and services. And if the retired have a guarantee that they will get more claims to offset any adjustment in price, such as the inflation adjustment under Social Security, everyone else will be pauperized by inflation.
In reality, the goods and services consumed by Americans, working and retired, in 2030 will have to be produced by working Americans in 2030. That’s where the food, clothing, shelter, health care, and custodial care of seniors with self-care limitations will come from. Someone will have to do the work, not matter who holds what paper. It might have been possible for the United States to produce a surplus during the past 25 years, send it to developing countries like China to invest in their development, and then have those developing countries pay it back as our population ages. But as a result of our individual and political decisions, we have in fact done the reverse, and will be forced to produce a surplus to pay back other countries in addition to paying for retirement in the future, no matter how many pieces of paper are issued.
If the problem of Social Security is pushed off to a crisis, what would happen then? I can conceive of two additional alternative means of sticking the cost onto those who were not “at or over 55” in 2005, one of which could be cloaked in the ideology of the Democratic Party as it currently exists, and one of which would be cloaked in recent Republican rhetoric.
The likely Democratic alternative will be means testing: reducing Social Security benefits for those with other retirement income, in order to preserve benefits for the less well off without bankrupting the economy. The Democrats have already pushed through something similar — the phase out of income tax deductions and exemptions, including those intended to provide social support for raising a child, for those with higher incomes. Their justification would be to “take back” in lower benefits the ill gotten gains of the rich who have benefited from the current robber baron era, while helping the struggling middle class. Even though the affluent also paid more in, the Democrats will argue that cutting their Social Security benefits is “fairness.”
But would it be? Those with retirement savings are not necessarily those who made out the best during their working lives. They are also those who sacrificed and saved during their working lives, rather than spending everything they earned, and then some, on a higher consumption lifestyle. The Wall Street Journal recently reported a survey that showed that those earning big bonuses on Wall Street this year planned to spend nearly all of it on luxury consumption, saving little and donating little to charity. It may very well be that under a “means testing” alternative, these partying bankers will be considered less well off in old age, and get Social Security, while your author is considered “rich” and has his benefits reduced or eliminated. Knowing what may be coming, perhaps it is no accident that these financially savvy people make the choices they do.
The Democrats wouldn’t have to do means testing that way. They could use the Social Security records to reduce the benefits of those who had earned the most, whether they had spent it all or not. But that would mean severe hardship for those affluent people who had nothing left in their later years, and would thus be very unpopular since more and more Americans of all income levels are approaching retirement with nothing left. And, moreover, the SUV, plasma TV and McMansion vote is highly sought after by both political parties. The Democrats are in favor of those with six figure incomes who are “living paycheck to paycheck,” not those earning half that amount with money in the bank.
There is one means testing scenario that is almost certain to occur — a reduction in Social Security benefits for those with defined benefit pensions. As I pointed out last summer, 20 years from now former public employees will be just about the only people left with defined benefit pensions. Since there is not enough money being set aside to pay those pensions and the health benefits that go with them, state and local taxes will be soaring, and public services will be cut, all over the country to pay for them. Those paying the higher taxes and suffering the effect of those service cuts will also be facing a far less lucrative old age; even more recent public employees will be facing layoffs and diminished compensation under the multi-tier contracts that have been imposed, and will be imposed, by their elders. Meanwhile, public employee retirement benefits were in many cases enhanced in political deals in the 1990s, something sure to be brought up in 2027.
The problem will be nationwide, and a huge political outcry against state and local employee retirement benefits is likely. The unions are counting on federal law and, in New York State a constitutional provision, guaranteeing their pensions. But there is no law that can prevent the federal government from reducing Social Security benefits for those with such pensions, and then returning the savings to state and local governments to preserve public services and the jobs of then-current public employees. The public employee retirees will probably have little or no political support from either political party.
The likely Republican alternative will be to base Social Security on just one beneficiary per household, rather than two. Republicans could argue that as conceived in 1933, the Social Security program envisioned a “traditional” family with one wage earner and the wife at home caring for the children, but the more recent entry of women into the labor force would allow some families to “unfairly” collect twice. I call this the “baking cookies” scenario, quoting our junior Senator, because Republicans would argue that women who stayed home “baking cookies” and cared for their children should not have their Social Security benefits reduced so other families could collect twice.
The Republicans have already pushed through something similar. Working couples have long complained about the “marriage tax,” with such couples facing higher taxes than they would owe as two single people (since each of their incomes would be lower than the two incomes combined). But when the Republicans pushed through legislation to eliminate the marriage tax earlier this decade, they insisted on providing the same break to a one-income couple as to a two-income couple. So two people working, earning $50,000 each, now pay the same taxes as an otherwise similar married couple with just one person working, earning $100,000 by himself. The other spouse could be “properly” home with the children, or without children and home watching TV.
That the “baking cookies” scenario is unfair is clear. First of all, under current law two people are due to collect because two people worked and contributed. What is to be said for all the payroll taxes put in by the second spouse if they are not entitled to collect? Second, many of today’s families have no choice but to send multiple people to work, in part because they need extra income to pay all those extra payroll taxes. Still, the “baking cookies” scenario would allow Republicans to talk about “family values” while cutting benefits, rather than cutting benefits. They could say that for the top earning spouse, presumably the male, and his survivor, benefits are unchanged.
It is worth noting that either the means testing scenario or the baking cookies scenario would encourage the kind of tactics the middle class now uses to benefit from Medicaid, but on a far vaster scale. Older people could give their money to the kids to eliminate retirement income and qualify for Social Security. Or they could get a “divorce,” allowing both spouses to collect based on their work earnings. Or they could just spend rather than save, because in the end any savings would just end up reducing Social Security benefits.
Bottom line: there isn’t enough money to go around. The Bush privatization alternative would hurt the poor or, if the poor were protected, the middle class. Only the very affluent might come out ahead, and only if investment returns were far larger than they are likely to be. It is just another way to promise something for nothing in the future in exchange for taking something now. A future Democratic means testing alternative would cheat savers to benefit those who borrowed and spent to live large. A future Republican “baking cookies” scenario would zap two worker couples. And raising taxes or borrowing to pay the benefits now promised would mean the Baby Boomers would do even more damage to their children’s economic future than their parents have done to theirs. These are four of the five solutions. I am in favor of the fifth solution, the subject of my final Social Security post.