More on Social Security

There's much more on the Social Security debate. The Lord of Truth sent me this article earlier this week, where Brandon Miniter of the Wall Street Journal reviewed his Social Security statement and realized that it made the case for reform all by its lonesome...

Looking over the letter, however, it became clear that there is a fundamental flaw in the arrangement. Although, I've already paid enough into the system to "qualify" for benefits, not a penny of that money is likely to be counted in determining the size of my retirement benefits. What's more, whatever I pay over the next two years probably won't count either. The problem here is that I am only 30 years old. Social Security counts only a worker's top 35 wage-earning years when determining benefits. And since the government considers 67 to be my "full retirement age," assuming a steady climb of income, I'm still two years away from starting to accrue the credit that will determine the size of my monthly Social Security check. In other words, the system is exactly the inverse of what we've all been told to do in planning for our retirement. Those who work hard and put money into the system early in life, get the same as those who start paying in later on. And as a proportion of what they've paid in, the early-contributing ants actually get less than their grasshopper peers.

Those who defend the current system are always quick to point out that Social Security isn't supposed to be a pension, but rather an insurance policy that takes care of the disabled as well as providing a retirement benefit. But here too, the system is skewed against those who pay in early. According to the letter I recently received, if I become disabled my monthly checks will be about $250 larger (in today's dollars) than they will be if I take early retirement at 62. And although there's no credit for early work, those who work a few years after their full retirement age get credit for the "extra" money they pay in. If I retire at 70, my monthly checks will be about $800 larger than they would be if I was to take early retirement and $400 more than if I call it quits at 67.

I think that hit both the Lord and myself the same way -- we're both 30 years old, yet neither of us is writing for the Journal. Seriously, take a look at those numbers and try to make the case that this program is a good idea -- you can't. The basic argument for Social Security in its present form seems to be "But we've always done it this way!"

Better yet, the way we've always done it seems to be pretty stupid as well. Here's a short excerpt from an excellent piece by Alan Reynolds in last week's National Review...

The population aged 65 or older will increase from 37 million today to 75 million in 2035, when their average life expectancy will be 85. Because future beneficiaries will live longer, they will receive more benefits over their lifetimes. Meanwhile, the number of younger workers who pay for these retirees will barely rise. Economists Jagadeesh Gokhale and Kent Smetters note that today, “there are almost five people of working age (between 20 and 64) for each retiree age 65 and over. By 2030, the number of working-age people per retiree will decline to less than three; by 2080, the ratio will decline to about two.” Any burden shared by half as many taxpayers must, as a matter of simple arithmetic, become twice as heavy.

This demographic time bomb has been compounded by an arbitrary “wage indexing” formula. The level of benefits when people first start collecting Social Security happened, in the late 1970s, to be indexed to average growth of real wages rather than simply adjusted for inflation (as many experts proposed). As a result, benefits for new retirees become more generous by about 1 percent each year in real terms, which adds up fast. “The purchasing power of the average earner’s benefits at retirement is expected to nearly double between now and 2075,” notes the Congressional Budget Office, with the result that “45 percent of the rise in spending is due to a projected increase in the real value of Social Security benefit checks.” As long as initial benefits are indexed the way they are, faster economic growth will not help much — because it would result in faster wage growth and therefore larger Social Security benefits.

The reason future taxpayers cannot and will not pay rising real benefits to twice as many seniors is basic economics. Nobel laureate Edward Prescott found that lower income, payroll, and sales taxes fully explain why Americans work so much harder and longer than Europeans. In economic jargon, lifetime work effort is highly “elastic” (responsive) with respect to tax rates. “The large labor-supply elasticity,” Prescott concludes, “means that as populations age, promises of payments to the current and future old cannot be financed by increasing tax rates. These promises can be honored by reducing the effective marginal tax rate on labor and moving toward [different] retirement systems. . . . Requiring people to save for their retirement years [in personal accounts] is not a tax and does not reduce labor supply.”

So basically, we will have a system that doesn't provide enough money for retirement and provides disincentives to work. Yeah, that makes sense for a government program. Does anyone know why we have this program?