Campaign Issues 2016 1.

Currently, Social Security faces two fundamental problems.[1]  One fundamental problem is that Social Security is based on a “pay-as-you-go” model: withholding taxes from people who are working pay for the retirement of people who are no longer working.  Fine.  If there are a lot of people working and a smaller number not working, then the system functions smoothly.  What if the number of people working declines relative to the number of those who are not working?  That’s more of a problem.  Taxes on those still working will have to rise to pay for those no longer working.  That is the situation in which Americans find themselves as the “Baby Boom” generation passes out of the work force and into the work-for-me force.

This problem has been around for a long time and people in authority have been trying to devise a solution for a long time.   In 1983 a bi-partisan commission investigated solutions.  Congress followed the commission’s recommendations by raising taxes and extending the age of full eligibility. That fixed the problem for a while, but—of course–“I’m back!”  In a report of 2015, the trustees reported that the Social Security trust fund will go broke in 2034, with the Social Security Administration able to pay less than 79 cents on the dollar of benefits.  In 2011-2012, President Barack Obama sketched a budget compromise agreement in which Social Security would be continually eroded by inflation.  The Republicans weren’t buying this idea.  Another solution, which could be combined with de-coupling Social Security benefits from the inflation index, would be to raise the cap on with-holding taxes.  Currently, only income below about $134,000 a year is subject to with-holding.  Raising that ceiling would generate a lot of revenue.  Taken together, these proposals probably offer a manageable means to solve the Social Security problem for the immediate future.

A second fundamental problem is that Social Security was never designed to be a full retirement pension.  It was meant to provide a basic income for retirees, who were expected to save from current income to pay for the bulk of their future retirement needs.  However, many members of the “Baby Boom” did not do any significant saving for their retirement.

Now, under the influence of the Bernie Sanders campaign, the Democrats have come out for expanding Social Security to make its benefits more generous.  Hillary Clinton has pledged to increase benefits for widows and for those who stop working to be care providers for children or sick family members; to resist reduction of cost-of-living increases; and to resist increasing the age for full eligibility.  She would pay for these increased benefits through higher taxes on the wealthy.  Still, even these proposals don’t go as far as the left wing of the party wants.  President Obama has remarked that “a lot of Americans don’t have retirement savings [and] fewer people have pensions they can really count on.”  How to make up for this lifetime lack of thrift?

Current proposals include increasing the benefits for all recipients while providing additional benefits for the uncertain number of the “most vulnerable”; and/or increasing cost-of-living adjustments to include medical costs.

Several questions arise out of these problems.  First, which “Baby Boomers” did not save and why did they not save?  Moral recriminations are going to be a part of this debate.  Second, what are these proposals likely to cost?  Third, how large a share of the well-off will have to be taxed more heavily?  Just the “1 percent” or the “5 percent” or anyone who did manage to save?  Fourth, do Americans want to transition Social Security from the current partial pension system to a full-blown national retirement system?   What would a long-term system require?

[1] Robert Pear, “Driven by Campaign Populism, Democrats Unite on Social Security Plan,” NYT, 19 June 2016.

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