An entire generation of robber barons is preparing to plunder the economic future of its children, and no one seems concerned. In case you’re wondering, the generational heist in question is Social Security. The thieves would be our parents (and the rest of their baby-boomer brethren), and the victims of this government-sponsored shell game are 20-something Gen Xers like us.
At its inception during the Great Depression, Social Security was a forward-thinking and progressive program. It provided some measure of protection for widowers and retirees in an era of unprecedented economic unease. Times have changed remarkably since the first checks were mailed to recipients in January 1940, however.
Social Security has outlived itself and is, in the words of Nobel Prize-winning economist Milton Friedman, “designed for a world that no longer exists.”
In 1940, 54 percent of men and 61 percent of women could expect to celebrate their 65th birthday. Today, thanks to miracle medicine, worker-friendly workplaces, etc., 72 percent of men and 84 percent of women can look forward to reaching the ripe old age of 65. Worse yet for Social Security, modern retirees are living longer than ever and drawing more and more benefits. Additionally, the ratio of workers to pensioners declined precipitously in the last several decades. In 1950 there were a whopping 16 workers for every retiree. Today roughly 3.3 laborers support a pensioner, and by 2030, only 2 workers will pay a retiree’s benefits.
Compounding matters further, we’re experiencing plodding wage growth, anemic productivity increases and shorter working lives. Perpetual prosperity petered out, and our generation will be the first in history to experience a stagnating standard of living.
One would sincerely hope a crisis like this would mobilize investigative journalists, motivate public policy-making elements in the Beltway and captivate the public’s attention. Alas, like a Tennessee Williams play, the stark reality is far less kind than any illusions we might harbor. Congress repeatedly ignores the issue and Clinton responded to it by creating an unempowered study group, the Social Security Advisory Panel, which issued a rather uninspiring task force report with dissenting recommendations.
Unfortunately, Social Security is so sacrosanct that no politician, save political martyrs like Dick Lamm (remember him?) and suicidal Republican freshman legislators will touch it. Millions of Americans consider a monthly Social Security check after 65 an enumerated constitutional right somewhere between free speech and the Fifth Amendment.
Surprisingly enough, the creator of Social Security intended just such a result. Franklin Roosevelt deftly funded his social insurance program with a separate payroll tax (ever wonder who that Federal Insurance Contributions Act guy was?) and spread the benefits to everyone. It was political largess for the masses, and with one fell swoop of the executive pen, the Era of Entitlements was born. Ironically, FDR couldn’t have known how wildly successful he’d be when he boasted, “no damn politician can ever scrap my Social Security program.”
If FDR’s brontosaurus-sized Social Security program is to be saved from extinction, fundamental change is required. And soon. The three proposals currently circulating include raising taxes, privatizing the system or adjusting benefits. Of these, reducing benefits is the only sensible option.
Supporters of tax increases blatantly ignore history. In 1950, the Social Security Administration took a 3 percent chunk of a wage-earner’s first $3,000. Taxes have multiplied ten times since then, and workers now find themselves 12.4 percent short on the first $61,200. The massive tax increases of ’83 were supposed to guarantee solvency for 75 years. In the 13 years since, four decades were slashed off the day of actuarial reckoning.
Raising taxes simply will not address the structural deficiencies of this financial Frankenstein. Furthermore, increases in FICA will depress hiring, suppress economic growth and reduce American competitiveness.
The privatization scheme proposed by politicians eagerly searching for a no-pain solution is also ill-advised. On paper the plan looks good — invest the trust fund in stocks that historically have outperformed treasury bonds by several percentage points annually. Supposedly the added investing power will be enough to prevent the Titanic of social insurance programs from sinking in a sea of red ink.
The dirty secret of privatization, however, is that it requires massive tax increases for the next 40 or 50 years. Here’s why — workers today will be obligated to pay benefits for current retirees while simultaneously putting away money for their own retirement. Hardly seems fair. Additionally the privatization plan raises a host of troubling issues. For example, how would the money be invested and by whom? Would the government steer clear of corporations with spotty environmental records or stormy labor relations? Would the billions flowing from government securities to the stock market raise interest rates (thereby decreasing gross private investment and increasing the cost of servicing the national debt)? Finally, do we really want big government as a 10 percent stakeholder of Ford, Exxon, 3M, AT&T, Intel and every other Fortune 500 firm?
Tax increases and privatization won’t work. Simply put, we must accept cuts in order to insure Social Security’s survival:
ù Means-test. Social Security cannot continue as an entitlement program, and it is ludicrous to argue that six-figure (or seven- or eight-figure) wage earners deserve a government-funded pension. We should reconfigure the program to serve as a floor-of-protection for the most vulnerable senior citizens in our society.
ù Recalculate cost-of-living-adjustments. The Congressional Budget Office believes the Consumer Price Index overstated inflation 0.2 to 0.8 percentage points in recent years, and Federal Reserve Chairman Alan Greenspan said the CPI “overestimates the true cost of living.” Over the past few decades the government doled out more than $300 billion in benefits than true inflation would warrant. On top of that, tax revenues suffered because indexed income tax brackets (on which marginal tax rates are based) outpaced actual gains in wages.
ù Reduce benefits. Reformulate benefit packages and begin by eliminating options like early retirement at 62.
ù Raise the age of eligibility. While life expectancies crept upward for the past 50 years, the Social Security Administration hasn’t increased the age of eligibility. Legislation passed in 1983 raised the retirement age to 67 over several decades, but the age hurdle should be raised even higher.
Federal spending on entitlements for Americans 65 or older topped out at more than $450 billion last year, and this madness must stop. This isn’t generational warfare — it’s just generational equity.
Dubbed a generation of whiners, Gen Xers aren’t being heard in Washington. We don’t organize, we don’t vote and more often than not, we simply don’t care. Hell, more of us believe we’ll be visited by UFOs than expect a Social Security check in 40 years. Now if we slackers formed a radical and vocal movement like, say, the American Association of Retired Persons, suddenly our whining would be respectable, perhaps even fashionable. But because Gen Xers like us are politically challenged, to say the least, that’s unlikely to happen anytime soon.
Greg Lauer’s column appears in the Daily every Wednesday.