Social Security: a Reckoning

Understanding what, and who, is to blame for the Social Security funding crisis will allow us to move on and reach a solution that fairly allocates costs amongst current generations.

Gov. Christie recently said that pension and health care obligations are "the core problems of government spending in the country."  Federal pension obligations under Social Security now are central to the current fiscal debate.  

It seems to me that many, in a casual way, think that the Social Security funding "disaster" is the result of the failure of current generations to adequately provide for their retirement.  That we, in some sense, have been profligate and irresponsible.  That is simply not true, and I think that if we don't understand what is in fact the case, we're not going to be able to fix the problem.

The problem with Social Security -- that assets in the "trust" are inadequate to pay benefits -- was a problem created by prior generations.  Prior generations lunched off their children's savings and that's why there is no money in the "trust."  The level of not-plain-speaking in this regard seriously prevents a useful discussion of the "fairness" of different positions.

The Social Security "crisis" is traceable to two policies.  The first of these is the use of pay-as-you-go (PAYGO) financing.  PAYGO uses wealth produced by the current working generation to pay for benefits for the current retired generation.  It is sold -- as Social Security was sold -- as a self-financed system.  So each generation (other than the first) sees itself as having "paid in" and therefore entitled to a payout.  That, of course, is not true, and any politician who says otherwise is either an idiot or a liar.  In reality, a PAYGO-financed retirement system is an agreement between generations to have each succeeding generation finance the benefits of their parents.  And as long as the population (and the economy) continues to reproduce itself evenly, generation to generation, and as long as benefits remain constant, this system should work.

The problem is, generations do not reproduce evenly.  Critically, a demographically "thin" generation (for instance, the pre-baby boom generations that started to retire in the 1960s and 70s), riding the wave of a demographically "fat" generation (the baby boom), can "vote itself a raise" out of money being paid in.  Which is exactly what happened.  In 1972, Congress approved a 20-percent increase in Social Security benefits.  This was the profligate generation.  It systematically looted Social Security revenues to pay itself.  Had it not done so, there would be adequate "money" in the Social Security "trust fund" to pay retirement benefits for the baby boom generation.

But, of course, there is no Social Security trust fund.  It is simply a rhetorical gesture.  Because, those same pre-baby boom generations booked Social Security tax revenues (which, as the baby boom entered the work force, boomed) against the general budget.  And then they spent those revenues on wars and pet projects.  Specifically, the decision to bring Social Security taxes onto the budget was made by Lyndon Johnson, in early 1968, as way to pay for both the Viet Nam war and the Great Society.  This is the second policy that led to the current Social Security funding "disaster."  Those same pre-baby boom generations created a phantom trust fund but spent the actual revenues on other, current expenses.  This isn't some made-up theory.  This is what actually happened.

I discuss all of this not to rubbish our parents but to make the point: the current retirement funding crisis, at the federal level at least, is not the result of fiscal irresponsibility by the generation now retiring.  It's the result of fiscal irresponsibility by prior generations.  But more deeply, it is the inevitable result of human nature + PAYGO + deficit spending.  PAYGO and deficit spending invite an easy disregard of the consequences to future generations of current spending.

The brute fact is: only the current generations can solve this problem; the retiring generation by using less (that is, taking a cut in benefits); the working generation by paying more.  Neither of these generations is at fault.  And, there is no way to get back the money (their savings) our parents squandered.

It does not seem to me that this has to be a Democrat vs. Republican issue.  Except, of course, if you think you can solve any problem simply by soaking the "rich" (that's people making over $250,000, right? or is it over $80,000?).  But in the world of adults (President Obama wants us to be adults, right?), what has to be done is obvious.  The system of PAYGO financing has to be de-leveraged.  The cost of doing so -- a cost created by people that are no longer around -- must be borne by current retirees and current workers.  And the simple solution -- an adult would say -- would be to split the difference.

Then, the entire financing of Social Security has to be taken off-budget.  So that the sacrifices being made by current generations cannot be reused to finance more wars and pet projects.  I'm not against war (although I am for world peace); I understand that some pet projects are very popular.  But -- pay for them yourself.  Don't make your kids pay for them.

Understanding what, and who, is to blame for the Social Security funding crisis will allow us to move on and reach a solution that fairly allocates costs amongst current generations.

Gov. Christie recently said that pension and health care obligations are "the core problems of government spending in the country."  Federal pension obligations under Social Security now are central to the current fiscal debate.  

It seems to me that many, in a casual way, think that the Social Security funding "disaster" is the result of the failure of current generations to adequately provide for their retirement.  That we, in some sense, have been profligate and irresponsible.  That is simply not true, and I think that if we don't understand what is in fact the case, we're not going to be able to fix the problem.

The problem with Social Security -- that assets in the "trust" are inadequate to pay benefits -- was a problem created by prior generations.  Prior generations lunched off their children's savings and that's why there is no money in the "trust."  The level of not-plain-speaking in this regard seriously prevents a useful discussion of the "fairness" of different positions.

The Social Security "crisis" is traceable to two policies.  The first of these is the use of pay-as-you-go (PAYGO) financing.  PAYGO uses wealth produced by the current working generation to pay for benefits for the current retired generation.  It is sold -- as Social Security was sold -- as a self-financed system.  So each generation (other than the first) sees itself as having "paid in" and therefore entitled to a payout.  That, of course, is not true, and any politician who says otherwise is either an idiot or a liar.  In reality, a PAYGO-financed retirement system is an agreement between generations to have each succeeding generation finance the benefits of their parents.  And as long as the population (and the economy) continues to reproduce itself evenly, generation to generation, and as long as benefits remain constant, this system should work.

The problem is, generations do not reproduce evenly.  Critically, a demographically "thin" generation (for instance, the pre-baby boom generations that started to retire in the 1960s and 70s), riding the wave of a demographically "fat" generation (the baby boom), can "vote itself a raise" out of money being paid in.  Which is exactly what happened.  In 1972, Congress approved a 20-percent increase in Social Security benefits.  This was the profligate generation.  It systematically looted Social Security revenues to pay itself.  Had it not done so, there would be adequate "money" in the Social Security "trust fund" to pay retirement benefits for the baby boom generation.

But, of course, there is no Social Security trust fund.  It is simply a rhetorical gesture.  Because, those same pre-baby boom generations booked Social Security tax revenues (which, as the baby boom entered the work force, boomed) against the general budget.  And then they spent those revenues on wars and pet projects.  Specifically, the decision to bring Social Security taxes onto the budget was made by Lyndon Johnson, in early 1968, as way to pay for both the Viet Nam war and the Great Society.  This is the second policy that led to the current Social Security funding "disaster."  Those same pre-baby boom generations created a phantom trust fund but spent the actual revenues on other, current expenses.  This isn't some made-up theory.  This is what actually happened.

I discuss all of this not to rubbish our parents but to make the point: the current retirement funding crisis, at the federal level at least, is not the result of fiscal irresponsibility by the generation now retiring.  It's the result of fiscal irresponsibility by prior generations.  But more deeply, it is the inevitable result of human nature + PAYGO + deficit spending.  PAYGO and deficit spending invite an easy disregard of the consequences to future generations of current spending.

The brute fact is: only the current generations can solve this problem; the retiring generation by using less (that is, taking a cut in benefits); the working generation by paying more.  Neither of these generations is at fault.  And, there is no way to get back the money (their savings) our parents squandered.

It does not seem to me that this has to be a Democrat vs. Republican issue.  Except, of course, if you think you can solve any problem simply by soaking the "rich" (that's people making over $250,000, right? or is it over $80,000?).  But in the world of adults (President Obama wants us to be adults, right?), what has to be done is obvious.  The system of PAYGO financing has to be de-leveraged.  The cost of doing so -- a cost created by people that are no longer around -- must be borne by current retirees and current workers.  And the simple solution -- an adult would say -- would be to split the difference.

Then, the entire financing of Social Security has to be taken off-budget.  So that the sacrifices being made by current generations cannot be reused to finance more wars and pet projects.  I'm not against war (although I am for world peace); I understand that some pet projects are very popular.  But -- pay for them yourself.  Don't make your kids pay for them.

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