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Means-Testing Social Security
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Essay by:Zachary Skaggs
The United States faces an uncertain fiscal future. Experts agree that the federal government’s current spending levels are unsustainable. An economic recession, financial bailouts, and an expensive stimulus bill have combined to create a projected $1.75 trillion deficit for 2009 and trillion-plus dollar deficits for years to come. Even had recent events never occurred, the benefits the federal government has promised future generations of Americans, primarily via Social Security and Medicare/Medicaid, are projected to consume an ever-growing and unsustainable share of the federal budget moving forward.
In seeking to restrain skyrocketing public debt levels—currently $11.9 trillion and growing at the enormous rate of $1 trillion per year—the U.S. health care system has lately come into focus. There are efforts afoot to refashion U.S. health care , which currently consumes 15% of GDP, along the lines of other systems that spend sometimes half as much (Japan spends about 8% of GDP) but achieve comparable health outcomes in their populations. Assuming that the goal of cost-reduction is achieved by these efforts—a big assumption—health care reform is one way to significantly cut into the U.S. government debt load.
The other major way to tackle U.S. debt, and the focus of this essay, is through reform of the Social Security system. The single largest item in the federal budget—indeed, the largest government program in the world—is the U.S. Social Security system, consuming about 20% of the federal government’s budget in a given year. But in moving to modify Social Security, we must be careful where we cut. Social Security plays an important role in providing for the financial security of the elderly, with some estimates arguing that Social Security keeps roughly 40% of Americans age 65 or older above the poverty line.
Social Security came into existence in 1935 as a centerpiece of President Franklin Delano Roosevelt’s New Deal legislation. Its purpose was to provide pensions to retired individuals, modeled after public pension programs that nations such as Germany had already adopted. Social Security has been repeatedly expanded since its inception. In 1940, Social Security paid benefits totaling $35 million. Today, Social Security payments go to 51 million Americans at the cost of $650 billion per year. This number is slated to rise exponentially as the Baby Boom generation enters retirement.
There have been various proposals to reduce future promised payments via Social Security. A debate during the presidency of George W. Bush centered on whether to institute a system of private accounts, by which younger workers could put a portion of their Social Security payments into an interest-accruing account that they personally would collect in old age. This contrasts with the current "pay-as-you-go" status quo in which Social Security payments to the retired are made on the basis of Social Security taxes taken from current workers. The proposal for private Social Security accounts, while it may have gained political traction, strikes me as a distraction when it comes to achieving fundamental cost-reduction for Social Security. The reform, by itself, does not actually promise to reduce promised payments via Social Security in the long-term, merely re-orient them via personal savings accounts. Moreover, in the short-term, the reform would require massive deficit spending and borrowing to finance, as younger workers move their money out of the system, leaving nothing by which to pay older retirees. Thus, the proposal seems politically unworkable and financially a wash, unless other reforms are also instituted.
Another proposal calls for raising the age at which Americans can claim Social Security benefits. Currently that age is 65, but while at the time of Social Security’s introduction this may have been the typical retirement age, today, people often work well beyond it. Raising the age at which people can collect Social Security benefits, while necessarily unjust to those who must wait longer than anticipated to collect Social Security benefits, strikes me as workable and a relatively pain-free way to reduce federal spending on Social Security. One problematic aspect, which is not a problem in the proposal I will delineate below, is that it would make it significantly difficult for the poor elderly between age 65 and whatever the retirement age were raised to.
Economist Tyler Cowen points out that Social Security consists of two components: a welfare component and a forced savings component. That is to say, Social Security forces workers to put away some money from their current earnings to be (theoretically) repaid to them in their old age. This, the forced saving component, is something that could be performed voluntarily by the worker and need not be administered by government fiat. At the same time, Social Security is also a form of welfare. It is this latter function that is the most important function that Social Security provides, the one for which it was originally intended, and the one that needs to be protected in the process of any reform. For that reason, I argue for means-testing Social Security, or essentially, converting Social Security into a form of welfare for the poor elderly. Only those individuals living below the poverty line would be granted Social Security benefits under this regime. It should be noted that the elderly are in fact generally the richest Americans, with peak wealth by age being 63 in the United States.
Converting Social Security into a system that acts purely as a welfare payment system for older individuals preserves the core function of Social Security while preserving America’s fiscal future. This proposal would significantly shrink benefits dealt out currently by Social Security as well as its future promised benefits. Moreover, it would do so in a manner that would not hurt the poorest and frailest among us. It would, however, represent a significant loss of potential wealth for the middle- and upper-class elderly, but, as noted, these represent some of the richest people in America. Note that this proposal could conceivably combined with other reasonable proposals such as raising the retirement age at which Social Security recipients begin receiving payments.
1. “1.75 Trillion Deficit Seen as Obama Unveils Budget Plan.” New York Times. February 26, 2009. Accessed Nov. 17, 2009 at http://www.nytimes.com/2009/02/27/us/politics/27web-budget.html.
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