Saturday, February 9, 2013

Social Security Sustainability

Any retirement system, when faced with increasing life spans, must resort to at least one of the following:

1:  Delayed retirements / increasing the retirement age
2:  Lower payments during retirement
3:  Higher savings rates or taxes when working

There is nothing wrong with this.  This is simply an obvious result of longer lifespans, and is equally true whether the retirement system in question is public or private.

Thirty years ago, Ronald Reagan and the Democratic Speaker of the House Tip O'Niell made a deal with regards to Social Security in order to deal with the gradual increase of life spans that had accumulated to that point, thus extending Social Security's actuarial balance into the 2030's by building up a reserve for the retiring baby boomers.  This was accomplished by a mix of tax increases and raising the retirement age, which was set to gradually increase to age 67 by 2022.

Thirty years later, we can see farther.  Our lifespans have increased even more, and therefore we either have to save more, retire still later, or try to spread the same amount of retirement dollars over a larger number of years.  What are Social Security's options for insuring its long-term stablity?  Actually, they are not all that bad, requiring modifications no worse than what Reagan and O'Niell chose.  There are plenty of options, such as raising the Social Security tax by 1% for both employer and employee, elimination of the earnings cap (currently $113,700, above which income you do not pay Social Security taxes), raising the retirement to 70, and a host of other smaller changes such as changing the cost-of-living-adjustment to be less generous, changing the payout formulas in order to reduce benefits to higher income workers, bring state and local government workers into the system, a straight benefit cut, etc.  Of course, these can be mixed and matched in any number of ways in order to hit the target.  For example, raising the retirement age one year, phasing in a 0.5% tax increase on both sides over ten years, and raising the cap 20% would put Social Security into balance for the entire 75 years that its actuaries calculate.  A group of policy wonks could crank out a bi-partisan, balanced solution over lunch. Given that Democrats hold the presidency and half of congress, and polls strongly indicate that the public prefers tax increases to benefit cuts in this matter, a fair deal would probably focus on the tax side.  The public, wisely in my opinion, realizes that this program is extremely valuable in ensuring a basic retirement for all, and is worth the price.

In the long run, Social Security can be thought of a system that transfers about 5% of the national income from current workers to current retirees.  It is self-evident that this is forever sustainable.  The only question is whether it would be better to shift this to around 6%, in order to maintain benefits at their current levels as the number of retirees increase, or whether to keep it at 5% and spread the money thinner.  Either way, Social Security is forever....or at least as long as we want it, which I hope is the same.