Saving Social Security

I recently received a petition for my signature to save social security from an expected Republican attack. To save it we must understand what it was meant to be and what it now is and what problems it faces.

Initially the Social Security program was meant to be a savings financed retirement fund to which employers would be required to contribute half of what was deducted from worker paycheck and put in the Social Security Trust Fund (a fully funded life insurance program). This is (or was supposed to be) like our personal IRAs but with the employer contribution (though many employers offer retirement programs for their employees to which they also contribute in addition to Social Security contributions). But from the beginning, current worker/employer contributions to the Trust Fund were used to finance current retiree benefits rather than being saved for the contributor’s future retirement, i.e., it was pay-as-you-go.

Three factors undermined this pay-as-you-go model. First, benefits were indexed to wages rather than inflation and as real wages have raise over time so have benefits. Second, the average life expectance of retirees has increased dramatically. When the Social Security scheme was launched in 1935, life expectancy in the US was a bit under 60 years (the average retiree received SS benefits for only a year or two). It is now 77.3, down a bit from 78.8 in 1919. Third, population growth has slowed and the number of workers taxes for this growing number of retirees has been and will continue to fall fast.  “Saving Social Security”

The simplest, and in my view most sensible, solution to this financing problem is to: a) increase the retirement age at which SS starts paying; b) increase the number of working age immigrates to help pay for the retired; and c) continue to encourage private pensions and IRAs. Unless you are French most of us continued working beyond normal retirement ages because we wanted to continue using our skills longer. We enjoyed what we did for more than just the money.

Adopting the above reforms would not reduce what a retiree SS beneficiary receives each month.  But it would reduce what she receives over her life time because would be retired for fewer years. Some people are calling this increase in the retirement age cutting Social Security.  What ever.

As I have argued elsewhere, I would replace Social Security with a Universal Basic Income.  “Our social safety net”