Thus far, I have laid out a moralistic tale on Social Security, with prior generations collecting extra payroll taxes from the young, promising benefits, and spending the money or cutting their income taxes, and borrowing on top of it. That, however, is only one of the problems with the program as it now exists, and on a going forward basis it isn’t even the most important problem. The main problem is that people are living longer. When social insurance for old age was first enacted, and the retirement age was set to age 65, that was also the average life expectancy. That’s why Social Security is actually called Old Age Survivor and Disability Insurance (OASDI) — one is taking out insurance against living to an old age. The average life expectancy for women (relevant because Social Security pays survivors even if they did not work), however, was already 73.1 years in 1960, and was 80.4 in 2004. Moreover, people used to work longer than they do today. In 1940, 66.9% of men age 65 and over were in the labor force, working or looking for work, according to the Historical Statistics of the United States. In 1890 that figure was 68.3%, but in 1985, it was just 15.5% for single men and 16.8% for married men. If people are going to live longer, they are either going to have to work longer as well, or they are going to place an unreasonable burden on the young.
I’ve heard just one person describe the Social Security issue correctly. The goal of the program is not to allow a healthy man to play golf and take cruises after age 62; it is to allow his frail wife (or mother or sister) to avoid deprivation after age 80. Today’s young and middle aged have one advantage that their elders didn’t have. Without the pressure of larger generations flooding the labor market behind them, they will be less likely to be pushed out of it. The labor force participation rate is already rising among those over age 65, the data show, for both men and women — the reversal happened in the mid-1980s, after the last of the Baby Boomers was absorbed and the unemployment rate started to fall. It will have to rise further. The age wave isn’t just the Baby Boomers, it is the Baby Boomers and everyone coming after. Yes there was a “Baby Bust,” but immigrants rushed in to make up the shortage in the labor market. Every future generation of retirees will be large, nearly equally so. A permanent, rather than temporary, solution is required.
I don’t propose changing the Social Security retirement age. I propose eliminating it as a specific guaranteed date altogether. Instead, the law should simply declare that the ratio of those working and paying in to Social Security (including those also collecting) to those collecting Social Security shall forever be 3. People would be allowed to begin collecting, in birthday order, as room was made available as older beneficiaries died and/or more young people started working. This could be considered in some sense equitable. The retirement age might change, but the ratio of the retired to the working would remain the same. If people in general lived longer, they would be required to work longer, but would also be retired and supported by others longer. If rising obesity cut life expectancy, the retirement age would fall, keeping the ratio the same. Some people in poor health may have to be permitted an earlier retirement date due to disability, forcing others to keep working longer to keep the ratio the same. If properly selected, however, such people would presumably die younger, spending no more time in retirement on average than the healthy.
In addition, instead of having a guaranteed inflation adjustment, Social Security benefits should rise or fall with the incomes of those paying into the program, keeping the amount of money coming in equal to the amount going out. Rather than benefiting at the expense of workers, or falling behind them, the fortunes of the retired would therefore be linked to those of later generations. In the 1970s, under the rules then in effect, when Social Security benefits were adjusted for inflation but workers wages and therefore Social Security taxes) fell behind, the young faced an exploding burden in hard times and the Social Security program nearly went broke. More recently, some have proposed linking benefits prior to retirement to inflation rather than average wages if the former was lower, cutting benefits for the retired if the economy continues to grow and workers become relatively richer. Under this proposal, all would prosper and sacrifice together.
With these two provisions in place, the entire Social Security shortage is instantly eliminated, now and for all time. Senator Moynihan’s advice could be followed, the program could be restored to a pay-as-you-go basis, and the Social Security portion of the payroll tax cut. Moreover, having admitted that the payroll tax is just a tax and not an insurance payment, there is no excuse for it to continue to be regressive. Instead it should be applied from the first dollar of earnings to the last, like the Medicare portion of it, allowing the tax rate to be cut further. For workers with earnings of $90,000 or less (in $2005), the savings could be returned in lower taxes. Or the total tax rate could be kept the same, with the excess diverted into the private accounts President Bush and some others want. Or, better yet, the total tax rate could be kept the same, with the excess added to the Medicare tax as a foundation for a universal health care guarantee under Medicare Managed care. Of course, people would continue to be free to retire earlier on their own retirement savings, just as they would be live better in retirement by saving more when they were young. The important thing is, however, is a guarantee of at least a decent life in what is now old age would be preserved, despite the diversion of the $1.86 billion. For me, for my children, and for my grandchildren, something others would deny.
With these rules in place, moreover, it could be fairly said that my generation, and those after, wouldn’t have a bad deal. Instead, older generations would have had a particularly good deal. Thanks to larger generations behind them, they were able to start living longer before having to start working longer, getting a long period of leisure as a result. They might have worked just two years for every year in retirement, or even one year for every year in retirement if they were public in employees, rather than three or so in the future. For those generations in or near retirement today, however, having a big generation behind them was not always such a benefit. Local elementary and secondary school spending was a bigger burden on the economy in the late 1960s and early 1970s than it is today, thanks to the same demographic trends that are likely to increase the burden of the seniors. And at least in my family, my parents and grandparents were not so well off at the time compared with later years.
Nor is the American retirement situation so dire when compared with other nations. Unlike Europe, our birth rate is at replacement, so with a little adjustment in the retirement age we need not have fewer workers carrying more retirees. Both in Europe and in China, in contrast, with very few children being born in recent decades those children will face an enormous burden caring for a larger number of older people. The benefit all of today’s adults will receive from all of tomorrow’s children is one reason that it is fair and reasonable for the childless to pay taxes to aid in the care and education of those children. With total U.S. fertility at replacement, but native born fertility slightly below, one can argue the childless are either paying just the right amount, or too little, to help others raise the right amount of children for our society as a whole.
What might a 3 to 1 worker to beneficiary ratio look like in the future? Let's say that between age 18 and eligibility to collect Social Security, three-quarters of all adults were working, with those not working in school, disabled, unemployed or on public assistance, at home with kids or severely disabled parents, retired on their own dime, or living off trust funds. This is not an unreasonable assumption, based on current data. Well three-quarters of the 54 years from age 18 to age 72 means 40.5 years of work on average per adult. And at a 3 workers to 1 retiree ratio, 40.5 years of work could support 13.5 years of collecting Social Security. And the life expectancy at age 72 was around 13.5. So there is your retirement age at some point in the future. Rather than stop rising at age 67, it would keep gradually rising until equilibrium was reached. (By the way, the requirement in both the UK and France is 40 years work to retire with their equivalent of Social Security at age 65.)
The retirement age will probably change, but how much and in which direction is uncertain. If life expectancy were to continue to rise, people would have to work longer before collecting. If rising obesity and diabetes reduced life expectancy, however, people will be able to collect sooner. But if obesity and diabetes also forced more people to stop working early due to disability, or if more people chose to retire early on their own dime, the non-disabled would have to collect later. But if some workers chose to continue working past the age of eligibility, others would be able to collect sooner, even if those still working were also collecting Social Security.
The data currently show an increase in disability after age 75, but good health, for most, before that. On a personal level, those who were not "at or over 55" in 2005 when President Bush said those words should probably expect to continue working until that point if they can, regardless of how the prior generation decides to stick us with the bill. That is what I assume for myself. Maybe not in the same sort of job, and maybe not full time. But I’ll have to keep working. That won't be the "Golden Years" deal that those who were between 55 and 75 years old between the mid-1970s (when Social Security was first indexed for inflation) and, say, 2015 got, but it won't be so bad — unless prior generations load up so much debt on us that we are working in poverty.
Without the payroll tax surplus, of course, the income tax or some other tax would have to rise. That is, it would have to rise by more than it would have to rise anyway to reduce our budget deficit before we end up with a fiscal meltdown. And if we have a recession and get into the middle of such a meltdown, it might have to rise even more to get out of it. Some may not like this, and thus prefer to keep collecting regressive payroll taxes and using them for the general budget, but there is at most just a decade of this left anyway. Bottom line — no matter what happens, there is going to be a big income tax increase. Low tax advocates should not have voted for a political party that claimed to cut taxes but in fact deferred them, reducing them for one generation but increasing them for the next by a greater amount.
This all sounds reasonable, one might say, but what about the “generational betrayal?” Won’t that hurt us? The fact is, it already has, but the minute we go back to a pay as you go system under the rules I described, it will hurt us no longer. More of us should have listened to Senator Moynihan nearly 20 years ago (and not just about Social Security). But at this point we should cut our losses and move forward.
The generations who benefited from the $1.86 trillion allegedly in the trust fund, however, should not be permitted to just wipe it off the books and forget about it. They need to be told, and reminded over and over again, of what has been done in the past. The reason is that far from being satisfied with the good deal they have had, today’s seniors have an unbelievable sense of entitlement, and continue to demand more. More health benefits. More tax breaks. More housekeeping services. More of everything, without giving a thought of how their own children, let along young people in general, might be affected by this. And the 1960s generation, now approaching retirement, may be the most self-absorbed and entitled in the history of humanity.
So with every future annual Social Security statement showing the latest estimate of when today’s young might be able to retire, there ought to be a statement of when they would have been able to retire if prior generations did not blow the $1.86 billion in extra Social Security taxes. And every senior citizen who was able to retire at age 65 or earlier should also get a statement with the estimated retirement date of someone 30 years younger than they are, and what it could have been if their generation hadn’t blown the $1.86 billion. With this information being placed in front of everyone in the country each and every year, perhaps the senior demands and political pandering will stop. We’ve had 35 years of it, and that is enough.