Major Issues in the Debate: Sorting out the Priorities and the Role of Social Security for the Elderly

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For the past half-century, spending on the elderly has been the highest expenditure priority of the federal government. As that spending has grown from 10 percent of non-interest domestic spending to about one-half, it did much good. As it has continued to require higher shares of federal taxes, Social Security has steadily been pushing aside other domestic spending, whether measured as shares of the budget or of gross domestic product.

Today a new demand has been placed on both public and private budgets — the need to combat terrorism through new, not-yet-fully-understood, defense and internal Security measures. But public expenses are only the tip of the iceberg. Shifting domestic priorities initially means more job losses as workers are transferred. In the economic slowdown, hundreds of thousands of workers have already been idled and hundreds of billions of dollars in output lost. And this doesn’t even address the important issue of “outsourcing”.

Retirement Age and Poverty Issues

Shifting resources to meet greater needs requires attention to two other matters that up to now have been given short shrift: the scheduled depression-size decline in the adult employment rate, and the “poor” job that Social Security does with additional resources to reduce the poverty rate.

Over the postwar period, the trend toward more and more years in retirement — whether through longer lives or earlier retirement — was more than offset by the increase in female labor force participation, allowing for continual growth in the adult employment rate (the percentage of adults who are employed). But that era is over. The danger we now face is twofold. First, once the early baby boomers hit their 60s, the adult employment rate could fall precipitously. In the recent past, we considered increases in the unemployment rate of 4/10 of 1 percent a red flag signaling possible recession. Barring reforms to encourage employment among those in their 60s and early 70s — now the largest group of potential employees in the nation — we could see an equivalent recessionary hit from the labor force every year for more than two decades running.

Second, Social Security employment incentives could dampen the ability of the economy to recover from a downturn or recession. In the post World War II period, a downturn meant shifts in demands for labor that eventually would be met by the redeployment of idle resources and increases in labor force participation (particularly among women). But recessions now and in the future potentially involve a much larger contingent of more permanent drop-outs from the labor force among the near elderly and no large source of females to be drawn into the labor force. Thus, even a reformed Social Security could prolong and exacerbate any economic downturn if the employment incentives associated with retirement ages and the structure of lifetime benefits aren’t part of that reform.

Meeting the Needs of the Elderly Poor

For many reasons, the current Social Security system does an increasingly inadequate job of directing new resources to the needs of the elderly poor, even though the initial purpose for the program was concern over the poverty situation among the elderly. Among its primary defects is that Social Security discriminates against single heads of household who work, pay taxes, raise children, and yet get lower benefits than some individuals who do none of these. Under the current Social Security structure, very large spousal and survivor benefits are independent of any additional contributions and do nothing for single heads of household. Because the numbers of single heads of household have grown significantly, the projected reduction in elderly poverty is very modest relative to the scheduled increase in benefit payments of hundreds of billions of dollars.

We should also establish a decent minimum benefit that insures that the bottom one-third or so of the income distribution is better off no matter what happens to any individual account or private pension policy. Let this minimum be indexed over time by wages even if other benefits grow more slowly. Adjust spousal and widow and widower payments so that they do not discriminate so much against single heads of household (or against couples with more equal distributions of earnings among themselves).

To deal with poverty among widows and widowers, some of this adjustment should be in the form of reduced benefits up front to pay for higher benefits when one spouse dies. A minimum benefit is also one of the surest ways to insure that lower-income women and minorities fare well in any reform. I simply don’t believe that you can solve all these problems— removal of a net addition to risk to low-income individuals from reform, a fairer allocation of what now is spent on spousal and widow and widower benefits, and an insured improvement of the status of lower-income women and minorities through a means-tested approach. Means-testing additionally involves all sorts of enforcement problems and saving disincentives.

Consider the following points:

  • The crisis is that there are three workers now for each retiree collecting a check. Compare that to the 1930s when the worker- to check-receiving retiree ratio was about 14-1.
  • With the U.S. population growing older and a huge segment of Baby Boomers poised to retire in the next decade or so, the country is moving dangerously close to running out of money to cover everyone.
  • With privatization introduced, basically you don’t have your money in long enough to make it work for you. With privatization, you need your money in for longer time.
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