There Is No Social Security Crisis

In all the talk of Social Security reform, there's one important fact that's overlooked far too often: Social Security can easily be funded at current levels indefinitely, without raising taxes. The only thing unsustainable about Social Security is politicians' promises to provide each successive generation with longer and more lavish retirements.

The rising costs of Social Security have been driven by two major trends. The first is the increase in the worker-to-recipient ratio. In 1960, there were 4.9 workers for each OASDI recipient (see tables 4.B1 and 5.A4 here). By 2004, the ratio had fallen by a third to 3.3 due to increases in life expectancy and college enrollment.

The second trend is the increase in monthly retirement benefits, as shown below (nominal data from table 5.C2 here and inflation calculator here):

Year Avg. Monthly Benefit
(2004 Dollars)
1940 $305
1950 $344
1960 $473
1970 $575
1980 $783
1990 $871
2000 $926
2004 $955

After adjusting for inflation, Social Security retirement benefits have tripled since 1940 and doubled since 1960!

Because of economic growth, it's possible to sustain either of these trends indefinitely without raising taxes. If we were to index the retirement age to life expectancy, keeping the average retirement length constant, we could continue to increase monthly benefits in real terms. Conversely, if we limit benefit growth to the rate of inflation, we can continue to fund ever longer retirements. Only if we insist on sustaining both trends does it become necessary to raise taxes.

And it gets better. If we stop both trends, freezing both the average retirement length and the average monthly benefit, wages will begin to outgrow benefits, providing a completely painless way to phase out Social Security or transition to private accounts. As the portion of wages needed to fund Social Security benefits decreases, the surplus can be used to cut payroll taxes and/or diverted to private accounts with zero transition costs. At the same time, no one's benefits ever need be cut, and future retirees will have a standard of living no lower than that of current retirees.

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Don nailed some good points,

Don nailed some good points, here are a few more:

The third major cost is that the money supposed to be earmarked for the fund is instead spent by politicians further adding to the overall liablility.

A minor mistatement by SS is that the interest income reported as revenue. It cannot be counted because it does not represent a real cash flow. The interest "earned" on the IOUs is simply new IOUs. If you make this adjustment, you will discover when tax revenues will not be able to pay benefits.

The ratio of workers per beneficiary has fallen because people are living longer and having less children not because they are expected to live long and are going to college.

Do you think you could beat 2% if you invested your own money? Assume that you have $1,000 and invested it for 40 years. Here are the results for various returns:

ROR FV
2.00% 1,208
3.00% 2,262
4.00% 3,801
5.00% 6,040
6.00% 9,286
7.00% 13,974
8.00% 20,725
9.00% 30,409
10.00% 44,259

If you could beat 2% by just 100 basis points, you would have an extra $1,000 in your pocket (nearly double).

Now lets assume a $30,000 starting salary at age 22 with a 3% per year salary growth ($95,000 by age 62) and the 7.50% employee contribution rates to SS. The total amount contributed (169,000) has the following values at retirement age:

ROR FV
2.00% 237,150
3.00% 285,032
4.00% 346,271
5.00% 425,019
6.00% 526,776
7.00% 658,824
8.00% 830,812
9.00% 1,055,527
10.00% 1,349,911

You may consider 2% lavish, but I consider it a ripoff compared to what I might be able to do on my own.

Is the government providing

Is the government providing anyone with longer, more lavish retirements, or are they just picking up slack that Employment benefits once covered but are increasingly rare?

I don't have statistics on it in front of me, but I imagine far more retirees are using Social Security as their primary or only source of income now than did in 1940.

According to this page,

According to this page, there's been a steep decline in labor force participation among men 65 and older. There's a chart on page 10 of this report that shows mean income for those over the age of 65 increasing at about twice the rate of OASI growth since 1974.

You are correct that far more retirees are using Social Security as their primary or only source of income now than in 1940, but that's largely because there were fewer than a quarter million Social Security beneficiaries in 1940 (see table 5.A4 referenced in the original post).

Brandon, After adjusting for

Brandon,

After adjusting for inflation, Social Security retirement benefits have tripled since 1940 and doubled since 1960!

If the adjusted benefits had doubled even faster, say in the 36 years between 1968 and 2004, that still would have only been a 2% annual growth rate. If you believe that current reported rates of price inflation are not understated by at least 2%, you must be an academic.

If $955 per month in 2004 is considered lavish, somebody must subsidising the hell out of your rent and you have access to the dumpsters of a fine restaurant.

The idea of increasing the retirement age with life expectancy is absurd unless you work for the government or a university, in which case SS is likely to be a relatively minor factor anyway. The trend of retirement age is effectively down, not up. As I understand it, 70% of new SS recipients start receiving benefits at 62. Increasing life expectancy doesn't necessarily mean that you are healthy enough to continue working or that you are productive enough for a profit-driven private employer to choose to continue to employ your high cost self in preference to a younger, healthier worker.

While you are not officially retired if you bag groceries at the supermarket, your real wage level has likely decreased by a significant factor. I would claim that a better effective measurement of retirement is if your best available wage has decreased by more than a factor of two for non-professionals.

Regards, Don

But Brandon, Don't you know

But Brandon,

Don't you know that freezing or decreasing the rate of growth of a government benefit counts as a "cut"?

Can you imagine the opposition of the grey-hair brigade when someone proposes such a "cut" in Social Security benefits?

John: I was thinking the

John:
I was thinking the same thing. If just reducing the rate of real growth is a "cut," then what would the left call it if we stopped real growth altogether? Maybe they won't be able to think of a word for such an unprecedented phenomenon, and the measure will pass unopposed.

Don: Neither $305/month nor

Don:
Neither $305/month nor $955/month may be very "lavish" in any absolute sense, but certainly $955/month is more lavish than $305. The first phrase that came to mind was "more generous," but a Catallarchist can't go around calling wealth redistribution programs "generous."

Is retirement age down because people wear out sooner, or is it down because they can afford to retire sooner? The kind of work people do these days is much less likely to cause disabilities than it once was, and the partially disabled now have many more opportunities than they once did. Regardless of the age at which people are actually retiring, I strongly suspect that the age at which people become physically unable to work is increasing. If more people can retire earlier, more power to them. I just prefer that the income redistribution program that subsidizes their retirements grow no faster than the economy as a whole.

I'm skeptical of the idea that cumulative inflation over the last forty years has been understated by a factor of two or more. Why do you think this is the case?

Patinator:
I do consider Social Security a rip-off. The point is that it's a rip-off that keeps growing. There's no reason we can't turn it into a rip-off that keeps shrinking.

More on your other points later.

Brandon, Is retirement age

Brandon,

Is retirement age down because people wear out sooner, or is it down because they can afford to retire sooner? The kind of work people do these days is much less likely to cause disabilities than it once was, and the partially disabled now have many more opportunities than they once did. Regardless of the age at which people are actually retiring, I strongly suspect that the age at which people become physically unable to work is increasing. If more people can retire earlier, more power to them. I just prefer that the income redistribution program that subsidizes their retirements grow no faster than the economy as a whole.

Although this is only supposition on my part, I suspect that the historical pattern by which someone spends an entire working career with a single employer at regularly increasing wages until normal retirement age has been largely broken. In many cases, it is not that people want to retire, or can really afford to retire, but that they have no better alternative, especially given that SS severely penalizes both work and investments.

I’m skeptical of the idea that cumulative inflation over the last forty years has been understated by a factor of two or more. Why do you think this is the case?

This was not what I claimed, although I wouldn't be too surprised if it were true. If the government were able to accomplish this, there is every reason to believe that it would do so. My claim involves current and future reporting, and only a 2% understatement, not a factor of two that may well in fact turn out to be the case if anyone could ever know.

If there had been no SS, and no Federal Reserve, it is highly likely that simply salting away 5 to 9% of cash wages at a modest interest rate would successfully fund retirement for many people with no investing expertise simply relying on the inherent fall in the prices of goods in line with the increase in the productivity of their production.

Regards, Don

Regardless of the trends in

Regardless of the trends in terms of amounts of money, I'm still sceptical that the actual standard of living of the average senior has increased by nearly that much. The inflation of the dollar and the inflation of the cost of living are not exactly the same.

Brandon, Don's 2%

Brandon,

Don's 2% understatement has been commented on by economists although at the momemt I can't remember who. One issue with the CPI calculation is what is/is not included. How much rent would you charge yourself if you rented the house you own? This is how housing costs are accounted for.

The other issue originated when Greenspan introduced hedonics to the calculation in 1995(?). Using a car as an example, this year's Honda Civic's list price of $20,000 is really only an $18,000 car because of the latest ABS, airbag, etc. benefit that you received because of increased productivity and technology.

Look at the future values in the first hypothetical invesment scenario above. Since our investment is $1,000, the future values also represent the factors. If inflation has been understated by only 1% for 40 years, the factor difference is almost double at 2.262 vs. 1.208.

This is speculation, but the reason why inflation would be understated is clear. GNP is higher (due to the deflator effect), salary increases and benefits paid (like SS) out are smaller.