At Project Syndicate economist Martin Feldstein notes the Social Security system’s structural problems:
But providing benefits to support a comfortable standard of living for retirees with just a modest rate of tax on the working population depends on there being a small number of pensioners relative to the number of taxpayers. That was true in these programs’ early years, but maintaining benefit levels became more difficult as more workers lived long enough to retire and longer after retirement, which increased the ratio of retirees to the taxpaying population.
Life expectancy in the United States, for example, has increased from 63 years in 1940, when the US Social Security program began, to 78 years in 2017. In 1960, there were five workers per retiree; today, there are only three. Looking ahead, the Social Security Administration’s actuaries forecast that the number of workers per retiree will decline to two by 2030. That implies that the tax rate needed to achieve the current benefit structure would have to rise from 12% today to 18% in 2030. Other major countries face a similar problem.
If it is not politically possible to raise the tax rate to support future retirees with the current structure of benefits, there are only two options to avoid a collapse of the entire system. One option is to slow the future growth of benefits so that they can be financed without a substantial tax increase. The other is to shift from a pure PAYG system to a mixed system that supplements fixed benefits with returns from financial investments.
As in every similar analysis I have ever seen he fails to point out two things. First, the present system relies, not just on the number of workers relative to the number of retirees but the distribution of income. When increases in income have increasingly gone to the top 1% of income earners while the payroll tax is capped, the system cannot survive.
Second, investments always entail risk. There will be both winners and losers. A system that combines a payroll tax with compulsory investments will result in some people earning more than they otherwise would and others less. There will always need to be a safety net. The alternative is to allow the elderly to be destitute.
Its an interesting and important policy issue. I suspect that the effect of income distribution is not generally incorporated (although it would be useful for complete treatment of the issue) is due to its relative importance. (Although I’ve never seen or attempted a back of the envelope analysis). That is, the number of years in retirement may have increased 6+ fold, from 3 to 18 years, and the supporting retirees declined by 40%. I suspect this dominates income distribution. Further, since those at the upper income levels receive more investment income, and the SS tax is a payroll tax, it diminishes the effect which you cite.
Which brings us to the last point. Capping SS taxation probably resulted from a notion that the Willie Sutton theory of taxation probably should not apply as a matter of equity, and to sell the program politically. It seems pretty clear to me that a gradual (rapidly gradual?) increase in the benefits eligibility age would be most closely aligned to the spirit of the programs history.
And we don’t even have Ted Kennedy to bring an elderly person before the Senate pleading “please don’t take away my social security.”
Treating Social Security as a simple retirement program like a 401K is entirely bogus. SS is also a program to encourage disability, marriage, divorce and breeding as well as discourage risk-taking and self-reliance (as all insurance does).
SS benefits are available to a disabled person under age 22, whether he’s ever worked or not. SS benefits are also available to a worker who becomes disabled before age 65.
SS benefits are available to the spouse and all dependent minor children as well as to up to 4 additional ex-spouses and all their minor children, whether or not any of them have ever worked, while the covered worker is still alive, and also after the death of a covered worker. None of these derivative benefits are available in the case of a non-breeding single worker.
These policies together make SS a discriminatory socialist give-away program instead of a fair retirement investment program, like a 401K.
Guarneri:
My point was not that dividend and royalty income should be taxed. It was that much of the increase in wage income over the last 30 years is not being taxed. Offhand I’d guess that 90% of those in the top 1% of income earners have wage income in excess of the FICA cap that is not subject to the tax. Even when the formula was last given a major readjustment 35 years ago that was not the assumption. When the assumptions change, you need to change the plan.
I would add that in 1960 not a great deal more than 2% of compensation was non-wage compensation. Now it’s 30% or more. That, too, is a violation of the program’s assumptions.
I understand. I didn’t intend to imply you think non-wage income should be subject to the tax. But you raise the issue of assumptions. Rather, I think you will find that demographics and life expectancy are the driving assumption here, not wage income in excess of the tax cap. Further, jimbino, in his own way, points out that benefits increases contribute to the programs issues.
The reasons that politicians/government do not and have not dealt with this is obvious. SS has been marketed as pay in-get out. To be honest and deal with causes of financial instability, like demographics or giving away candy, reduces it to another run of the mill income redistribution program. And that’s politically difficult.
It’s a funny thing. I’ve never seen a financial venture that was failing structurally where someone didn’t propose simply throwing more money at it. It works arithmetically by definition, but it really is just kicking the can down the road. We should resist that. At one point in our history the income tax was to be levied at a very modest rate on very few. Sure……..
Well, one thing seems reasonably likely – Congress will not address the systemic issues until they are forced to and maybe not even then.
I think House Speaker Nancy Pelosi, age 78, and Senate Majority Leader Mitch McConnell, age 76, have the wisdom of age to solve this problem. Let’s hope they live long enough!
It has long been assumed that productivity increases would provide revenue to cover earlier retirements and shorter work weeks in general.
Where have the benefits of progress and productivity growth gone to?
If you raise the age of eligibility, you disproportionately affect the poor negatively. They die at much younger ages. Many of them also do manual labor type work which may be more difficult to carry out at age 70. Also, the poor arent really living any longer as opposed to those who are well off who have seen major increases in life expectancy.
https://www.washingtonpost.com/news/wonk/wp/2015/09/18/the-government-is-spending-more-to-help-rich-seniors-than-poor-ones/?utm_term=.e44ed5c8dbf3
Steve
One thing is certain. The SSS is not going away, and benefits will not be cut. No social welfare program can be cut as long as there is any vestige of democracy or representative government. To do so requires a heavy-handed dictatorship.
So, if you want entitlements reform, consider how to establish a dictatorship.
Well, we could phase out SSI, and rely on expanded SSDI. If you’ve worked to age 89, but feel no longer up to it, apply for SSDI and prove you can’t work. Millions would do so, but possibly at an older age than 67.
I personally favor a mixed system and as with most other things, freedom of choice and the elimination of waste.
1) Grandfather those over a certain age who have paid into the system as it was. Give younger workers the choice to either stay with the old system or to take a chosen percentage of those taxes and invest them where they choose. Like IRA’s these investments would be tax free until they were cashed out as income after retirement. This would necessitate personalizing SS for younger workers, which is how it should be, rather than the Ponzi scheme it is today. I would have LOVED to have been able to take say, 20-35% of my SS taxes and invest them. Another advantage to this way of doing things is that black Americans,who tend to have shorter life expectancy than other groups would have something concrete to leave to their family instead of a meager benefit check. People should have a choice. Yes, some may pick bad investments, and some may pick ultra conservative ones like savings bonds. But many of them willcome out ahead…and the extra money as it’s withdrawn as income can be taxed to create revenue, n’est pah?
2) Put the SS trust fund off limits to government borrowing. That’s one way it got into trouble during the LBJ administration, when money was ‘borrowed’ to pay for the failure of all those Great Society programs.
3) Comb the SS and even more, the SSI files for people who shouldn’t be getting them. One of the ‘benefits’ of our overly generous family reunification policies are elderly migrants who can immediately apply for SSI, welfare and in some cases, SS benefits without having paid into the system.
An illegal migrant who manages to obtain an SS number (far easier than you would imagine,believe me) can receive benefits. It’s even easier to get on SSI. It’s similar to a very popular scam, claiming tax credits for children in a foreign country who may or may not even exist.