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Original image from By Social Security Administration - Social Security Administration, Public Domain, https://commons.wikimedia.org/w/index.php?curid=43304462
Modified by the author |
Social Security isn’t necessarily dead, but there have been Republicans trying in various ways to end since at least 2005, when George W. Bush came out of his re-election saying that he had won political capital and he intended to spend it.
Of course, that effort ended up going nowhere – Bush spent some political capital in his failed push, and then burned through a bunch of what was left with his botched response to Katrina later that year.
Now we’re back at it and the threat is arguably sharper. We’re dealing with a Republican party that is less independent from its president than 20 years ago, a president less inclined to listen to reason, and an off-brand Tony Stark who’s been given the keys to the kingdom and may well have the capability to make the Social Security system so dysfunctional that it falls apart without Republicans in Congress needing to leave their fingerprints on the murder weapon.
Social Security’s demise is hardly a foregone conclusion, but it’s enough of a possibility that I thought it was worth looking at what our options might be after it happens.
The part of this post above the fold is the TL;DR of the whole thing, a series of declarative statements.
Below the post is the “too long” explanation of that first declarative statement.
I hope I’ll lay out explanations of the rest over the next few weeks, but there’s usually a large gap between my intentions and my accomplishments.
Laying out the spine of the argument is easier, so here it is.
There are lots of different ways of organizing a retirement system: government pay-as-you-go (PAYGO) like Social Security; private PAYGO like an old-fashioned company pension; pre-funded company pensions, and private retirement accounts. But the differences among those systems are differences in accounting. Underneath, every single retirement system has to do the same thing. It has to move claims on current output from people who earned those claims by working to produce current output, to people who are no longer working and therefore not playing a role in the production of current output.
A retirement system might want to give a helping hand to people who, for whatever reason, had relatively low lifetime earnings. It also doesn’t want to incentivize people not to take care of themselves during their working lives. Those two goals are potentially in conflict, but Social Security strikes an intelligent balance between them.
People describe the Social Security trust fund as a fiction or a Ponzi scheme, the government borrowing money from itself to pay itself. That’s sort of true, but it’s more false. The 1983 reforms that led to the large (but shrinking) trust fund we have today represented an implicit bargain about who on the income scale would pay when. People of average or lower income would pay up front in the 1980s, 1990s, and 2000s, in order to build up the trust fund, so that Social Security was there for them when they retired. People of higher incomes would pay in the 2010s and after in order to fulfill that promise. Destroying the system now is letting higher-income folks out of their end of the deal, just when it becomes time to pay. And the part about it being a Ponzi scheme—“There’s no money in there for you when you retire! The money you pay now just goes right at the door to pay today’s retirees!”—that part is simply based on a failure to understand what a retirement system does, which is that it moves claims on current output from people who are working, to people who are no longer working.
Replacing Social Security with individual accounts has three problems. First, individual accounts have administrative costs that are an order of magnitude higher than Social Security. Second, the intelligent balance between cushion and incentives described above is impossible with individual accounts. And third, the promise of higher returns by putting money into the private market instead of Social Security is logically impossible to achieve on a system-wide basis, because of the unavoidable nature of every retirement system (moving claims on current output from people working to people who are no longer working).
A large part of why Social Security has financial problems is that more and more of the claims on current output are going to people in forms that don’t get taxed to cover Social Security. That’s a fixable problem.
Social Security faces three fundamental problems. First, an increasing share of the population is of retirement age. Second, the growth of GDP per capita is slowing down. Third, the system as currently funded will run out of money. That third one, as mentioned above, is fixable. The first two don’t have such obvious solutions, but they are just as serious for any alternative to Social Security, because the underlying nature of any retirement system is that it moves claims on current output from people who are working, to people who are no longer working.
Lastly—and to justify the title of “After Social Security”—if Musk et al. succeed in destroying Social Security, it will be disastrous, but it doesn’t have to mean the end of sensible retirement arrangements forever. The bad part is, they will have stolen a lot of money and impoverished millions and probably led to a significant amount of premature death as people face challenges they could have overcome had they had access to the Social Security benefits that were their due. But any retirement system is ultimately a social arrangement, one that (say it with me now) moves claims on current output from people who are working, to people who are no longer working. The true wealth of a country is not measured in collections of financial assets, but in the ability to accomplish useful things. To the extent that we still have that ability after Musk is done experimenting on us, it will be in our hands to decide whether to re-establish a decent retirement system.
That’s the spine of the argument, and it only took me about 750 words.
The rest of this post will be making good on the first claim, the thing that is most important of all to understand before trying to solve Social Security’s problems: Every retirement system moves claims on current output from people who are working, to people who are no longer working.
