Social Security Fix

Since we’ve looked at Messrs McCain and Obama’s positions on Social Security, it is now time for my proposal to fix Social Security.  There are two issues here.  The first is the looming bankruptcy of the system.  The second is the long-term, efficient operation of Social Security.  These problems need to be separated, because they require very different medicine.  Let’s begin with the goal of Social Security.  The goal is to reinforce the social compact that exists between today’s workers and today’s retirees.  As long as people wish to retire, they will require a means to finance it.  The role of Social Security is to provide a level of material living below which no retiree will subsist.  This level is absolute, it applies to every retiree whether one enters retirement in opulence or indigence.  This universal inclusion forms the fabric of the social compact that binds us all together.  Now that we have a guiding philosophy of sorts, let’s turn to the solutions.

To remedy the looming bankruptcy, a few things must be done, but they all involve increasing revenues. First and foremost, I would forbid the raiding of the Social Security Trust Fund to fund unrelated government expenses.  Congress and the President have made a habit out of doing this.  There is even a website devoted to ending this practice.  When Congress raids the Trust Fund, they issue more debt, in the form of IOUs.  These IOUs are special government securities backed by the full faith and credit of the US government.  Hence, raiding the Trust Fund doesn’t technically deplete it.  However, what this practice effectively amounts to is increasing government debt.  Why not, instead of hiding this increased issuance of debt in the Social Security Trust Fund, just issue ordinary, marketable US Treasuries?  This would have the advantage of keeping the extra debt in the sunlight for all to see.

Since universal inclusion is our goal, means-testing is out.  Some argue that Warren Buffet and Bill Gates should not be eligible for Social Security.  My retort is that everyone is included in the social compact, and means-testing would not affect a large enough number of people to make an impact.  This arises from the fact that only 5% of working individuals make more than about $102,000, as stated previously.  If the income limit were around this level or higher, I would claim that the number of people who are priced out of Social Security would be small.  Infringing upon the social compact is not warranted for such a small gain in revenue.  I would admit that maintaining the social compact with Social Security does have a cost beyond which it no longer makes sense, so don’t take me for a complete social romantic.

My main solution to close the revenue shortfall would be an increase in the taxable base achieved by raising the level of income subject to the Social Security payroll tax.  I would raise this level to ensure solvency for at least 75 years, under reasonable assumptions about inflation and life expectancy.  Solvency would be checked periodically, say every 5 years.  These solvency checks would adjust the income subject to the payroll tax in order to keep the program just solvent, or maybe 110 percent solvent for good measure.

I would also put in place a sliding retirement age.  I would allow people to begin receiving Social Security as soon as age 60, assuming they worked the required number of quarters.  However, I would adjust their payments depending upon the age of retirement.  The earlier you retire, the less the amount you receive per month.  I would consider increasing the amount of quarters required to work.  This would be contingent upon some kind of benefit cost analysis.

I would not propose any sort of privatization of Social Security.  Privatizing Social Security would amount to making the program a forced retirement savings system.  It is odd that right-wing politicians propose privatization, since its result, in a sense, would increase the infringement of individuals’ rights by forcing individuals to enroll in a government run annuity.  The current program gives you almost the same result, yes, but the way in which it achieves that result is entirely different.  It is said that privatizing Social Security would result in efficiency gains.  This is not true.  Any privatization would necessitate the creation of a giant bureaucracy to manage everyone’s accounts.  In addition, Wall Street Money+Men would surely take an “advisory” fee for directing everyone’s personal accounts.  This is not to say that the current pay-as-you-go system could not be made more efficient.

Since we have solved the solvency crises.  We can now move on to the more interesting question of how to make the long run operation of the Social Security system more efficient.  Since we’ve run a tad long here, I will spell this out in a subsequent post, but here is a preview.  The current system exclusively holds government debt in its Trust Fund.  If the scope of the Trust Fund is slightly expanded, then there is room for efficiency gains in the operation of the Social Security system.