13 July 2008

Straight Talk on Social Security

UPDATE: Josh Marshall

The debate about Social Security is the same as it was in 2005 and in most respects the same as it was in 1965. You have one group who believe in the current system -- which is an intergenerational bargain, insuring a baseline level of retirement security as well as insurance against premature, disability and for dependent children. The other side -- McCain's side -- thinks this is just wrong, morally and economically. And in its place they want to create a system of individual private investment accounts -- similar to a lifetime 401k.

That's the essence of the debate.
In the important field of security for our old people, it seems necessary to adopt three principles: First, non-contributory old-age pensions for those who are now too old to build up their own insurance. It is, of course, clear that for perhaps thirty years to come funds will have to be provided by the States and the Federal Government to meet these pensions. Second, compulsory contributory annuities which in time will establish a self-supporting system for those now young and for future generations. Third, voluntary contributory annuities by which individual initiative can increase the annual amounts received in old age. It is proposed that the Federal Government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans.
Progress and Prospects Under the Social Security Act. May 25, 1937
To be concrete, if we adopt the pay-as-you-go system, we must make absolutely certain that at the same time we not only balance the budget but proceed to retire the government debt within the next generation through the imposition, let us hope, of progressive taxes, in order that we do not reach a period in the future when the burden of the interest charges on a large public debt and the burden of a large government subsidy to the Federal Old-Age Insurance plan cannot be sustained through current taxation.
A Statement on the Automatic Increase in the Tax Rate Under the Federal Old-Age and Survivors Insurance System. November 27, 1944
In my testimony before this Committee last January, I made the following statement: "In the history of social insurance throughout the world the major difficulty of social insurance systems has been the lack of adequate financing of old-age retirement benefits. It is always easiest to delay levying the necessary insurance contributions, thus perpetuating and strengthening the belief that the insurance benefits are meager and the costs of the insurance system are low. Inevitably, when the time comes to increase the taxes, many reasons can always be advanced as to why the imposition of the additional taxes is unwise or impossible. In this country we are still in a position to avoid these mistakes by getting clearly established now that if our people want social insurance they must be willing to pay for it. The time to obtain the necessary contributions is when people are able to pay for the insurance and are willing to pay for it because they can be shown that they are getting their money's worth. If we should let a situation develop whereby it eventually becomes necessary to charge future beneficiaries rates in excess of the actuarial cost of the protection afforded them, we would be guilty of gross inequity and gross financial mismanagement, bound to imperil our social insurance system."
Framing the Social Security Debate: Values, Politics, and Economics. 1998
Competing reform proposals reflect contrasting views about the nature of the Social Security problem and how to solve it. This book examines issues about privatization, national savings and economic growth, the political risks and realities in reforms, lessons from private pension developments in the United States, and the efforts of other advanced industrial countries to adapt their old-age pensions to an aging population. It also poses philosophical arguments about collective versus individual responsibility and the implications of market risks and political risks for stable and secure retirement income policy.
The Real Deal: The History and Future of Social Security, p. 227. 1999
The original architects and builders of our Social Security system, such as Arthur Altmeyer, anticipated exactly the situation we face with pay-as-you-go financing. They thought it would prove to be unfair to future workers, and they did not want to see that eventuality materialize.
The Real Deal: The History and Future of Social Security, p. 202. 1999
We hope that this has convinced you that a pay-as-you-go Social Security system is not without risks. Americans are in this program for an entire lifetime and the risks are considerable. Think about it -- taxes were raised and benefits cut in 1977. Taxes were raised and future benefits cut in 1983. Now we see that the system has a large long-term deficit. Unless we consider changing its very structure, we will have no choice but to raise taxes and cut benefits once again. There aren't a lot of choices for fixing Social Security other than straightforward tax hikes and benefit cuts -- that is unless we set about designing a system that increases our nation's saving rate and ultimately increases the wealth of our children and grandchildren.
An Overview of the Social Security Program. 2001
From Social Security's earliest days, a contentious issue was whether the benefits that workers and their families received should be prefunded using the taxes that those workers paid, rather than the taxes paid by current workers. As the program was enacted in 1935, revenues dedicated to Social Security would have exceeded outlays by enough to build up very large surpluses. In effect, those excess revenues would have helped fund, in advance, the benefits that the same workers would receive later. Opponents of prefunding argued that such an arrangement would result either in pressure to increase spending or in federal government ownership of private assets. Later expansions to the program, along with postponement of increases in the payroll tax rate that were originally scheduled to occur during the 1940s, essentially moved Social Security to a pay-as-you-go basis.(23) That pay-as-you-go structure has worked, although with many changes in taxes and benefits along the way. But it has worked largely because the labor force has grown rapidly during much of the program's history. That situation is about to change, as the number of Social Security beneficiaries begins to increase much faster than the number of workers.