The Golden Years.

Can “social progress” have negative consequences? The social security systems established after the Second World War rested on the assumption that many workers would pay a small tax to support a few retirees for a few years.[1] In Western countries the ratio between active, tax-paying workers and inactive, benefit-receiving retirees has shifted from 14 retirees/100 people to 29 retirees/100 people. This has shifted the balance between the number of workers whose taxes support retirees and the number of retirees. Furthermore, people are living longer. Just since 1970, the average period which people spend in retirement has increased by seven years. This has increased the costs of retirement born by advanced societies. Between 1990 and 2011, public spending in this area increased from 6.2 percent of GDP to 7.9 percent. An aging population has more and more retirees and fewer and fewer workers to support them.

There’s Social Security and then there are your personal savings. These are the two chief components of retirement income for most American workers. Social Security originally was not meant to be a national pension system. It was meant to insure the aged against a steady diet of cat-food noodle casseroles. Today, Social Security pays out 39 percent of the career-average earnings of middle income workers and 54 percent of the career-average earnings of a low-wage worker. If projected personal savings are added to projected Social Security benefits, then a low wage worker could anticipate receiving 90 percent of his/her average lifetime wage. However, most low-wage workers don’t manage to save much. One study estimated that less than ten percent of the bottom 20 percent of retirees has any personal savings. Social Security only pays about 54 percent of these peoples average lifetime wage. Old age means a big fall in income.

The problems will get worse. Nominally, Social Security recipients are buffered by the Social Security “trust fund.” Even if we accept this fiction, then the trust fund will eventually be exhausted. By 2035, Social Security will be paying only 27.5 percent of average career wages.

The slow-growth American economy will not make it easier to resolve these problems. It isn’t generating higher wages for most workers. The retirement of the “Baby Boom” generation is likely to create labor shortages that will drag on economic growth. While it seems to be accepted that many Americans who are doing some kind of physical labor will have a hard time adding more years to their careers, it is also likely that many people doing some kind of office work will see their intellectual abilities degrade in the same way.

So, what is to be done? One solution—popular among liberals, but poison among conservatives—is to raise the cap on Social Security withholding for higher income groups in order to re-distribute the income (and reduce the savings) of the well-paid and the provident. Another solution—popular among the “serious people” often derided by Paul Krugman—is to raise the retirement age in order to reduce spending while raising contributions. The discussion of these options is likely to be messy. Both sides are likely to frame the debate in moral, rather than practical, terms. The well-off will be portrayed as “greedy,” as “selfish,” and as not “needing” all that they have. The needy will be portrayed as “takers,” as “slackers” and as people wanting to manipulate the political system to escape the consequences of their own bad choices.

Less than a year out from a presidential election, it would be nice if the issue came up in a debate.

[1] Eduardo Porter, “An Aging Society Changes the Story About a Decline of Poverty for Retirees,” NYT, 23 December 2015.

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