Social Security: Crisis and Reform
Social Security is an immensely popular income transfer program that taxes working people to pay benefits to the retired. On the surface, it appears to be a saving scheme in which today's recipients are getting back -- with earnings -- what they put into it during their working years. In fact, it is a pay-as-you-go (PAYGO) system in which today's working-age taxpayers are funding the benefits being received by their retired elders.
The financial crisis looming in the system's future has been widely discussed recently, as its trustees forecast that it will run short of funds in 7-8 years, forcing a mandatory cut in benefits. There are several short-term fixes available, like raising the retirement age further, lifting the cap on FICA taxes, or means-testing benefits so they don't go to higher-income recipients, but each has some secondary negative consequences and they have, in any case, been shown to buy us only a few years of relief, without solving the underlying problem.
A good first stop for explaining the root of the problem is Boston University economist Laurence Kotlikoff, widely known as one of the pioneers, along with Alan Auerbach, of the analysis of intergenerational income redistribution. I remember the conceptual shock of recognition that hit me when I read his 1984 paper, "Deficit Delusion," which explained that our usual conceptualization and measurement of the government's fiscal deficit are radically incomplete and therefore misleading. In 1992 came his book, "Generational Accounting," which clarified the technical issues surrounding Social Security for a mass audience. Here is Larry's reaction to the just-passed OBBB.
One frequently hears that Social Security is a Ponzi -- or "pyramid”-- scheme, but David Rose says that, technically, it's not, but, in fact, may be worse.
https://thedailyeconomy.org/article/social-security-is-not-a-ponzi-scheme-but-in-one-way-its-worse/
The financial stress on the program results from its flawed design combined with the change in population structure that almost continuously has reduced the ratio of payers to payees, a change which looks to be even worse than previously anticipated as fertility rates fall dramatically in the advanced industrial countries and in much of the developing world.
Reform of the scheme has been discussed many times, without a political consensus allowing for implementation. James Pethokoukis recounts the tale of the closest the U.S. has come to genuine reform, G.W. Bush's 2005 plan. Jim draws some advice for future efforts from the analysis of these events that was conducted by economist Andrew Biggs.
https://www.aei.org/economics/a-fascinating-and-demoralizing-bit-of-what-if-economic-history/
So, what should be done by our political representatives to guarantee a fiscally sustainable system for our children and grandchildren? In addition to Kotlikoff's reform proposal, as discussed in the post linked to above, a look at similar programs in other countries can be very helpful, as shown by Romina Boccia and Ivane Nachkebia, who focus on New Zealand, Canada, Germany, and Sweden.
When Did Bankrupting Our Children Become Big and Beautiful?
Since you ask, 1935.
The entire problem is not recognizing from the start that Social Security, like Medicare, like Medicaid, like unemployment insurance, is a within-generational transfer. Any time, for any reason we transfer out as benefits more than we transfer in as taxes, is a problem. We in effect borrow from investors to pay out the benefits and the lost income from the returns on the investments not made reduce growth and future prosperity.
The solution is pretty easy, some combination of raising more revenue and reducing benefits. To the extent that benefits are demographically driven suggest most of the adjustment needs to come on the revenue side.