Social Security Does Job, So Let’s Not Fiddle With It
Everyone and her sister seems to have an idea for “reforming” Social Security. Some want to reduce the benefits or restrict them to the needy. Others want to cut the payroll tax that finances the system. Still others advocate investing the reserves in private companies or using them to fix the roads. Here is my radical proposal: Leave well enough alone.
Social Security is one of America’s biggest successes. It has dramatically improved the quality of life for older Americans. Fifty years ago most elderly people were dependent on relatives or public charity. A large proportion were destitute. Thanks to Social Security, most older people now live decently and independently.
The Social Security concept is elegantly simple: Working people pay a fixed portion of their wages into a fund and are entitled to benefits when they retire or become disabled. Survivors get help if a breadwinner dies. The tax rates and benefit levels are adjusted so that, over the long haul, the system pays for itself.
Social Security is not welfare; it is social insurance. Since everyone pays, everyone is entitled to benefits. The retired aeronautical engineer gets a bigger Social Security check than the retired dishwasher because the engineer’s contributions to the fund were higher. But the difference in their Social Security checks is less than the difference in their contributions, because the formula for computing benefits favors low earners. The system reduces the inequalities of life a bit, without the indignity of charity.
Why should benefits go to rich people who do not need them? Because taxpayers are willing to support a social insurance system from which everyone benefits. They are reluctant to pay taxes to support only those who did not make it, many of whom they may regard as freeloaders.
Social Security should not be turned into a welfare system, but there is no reason for half the benefits to be tax free. Once someone has gotten back what he or she put into the system (with interest), any additional benefits should be fully taxable.
Although most of them do not know it, almost everyone now drawing Social Security benefits is getting back more than they contributed during their working lives. When the system was young, lots of workers were paying into the fund and few had retired, so Congress saw an opportunity to increase the benefits. Through the 1950s and ‘60s, benefits were raised regularly every couple of years--in election years, of course. In 1972, even Congress got worried that continuing this pattern would make the system too expensive, so it decided to restrict benefit increases to the inflation rate. In the last 19 years, aside from automatic adjustments to neutralize the effect of changes in the cost of living, benefit levels have not been raised at all--quite a record of political restraint in a democracy with a growing elderly population.
Social Security is not adding to the federal budget deficit; it is running a surplus. Building up the reserves in the system is appropriate because benefit payments will escalate in the next century, when the large “baby boom” generation retires. The trouble is that the rest of the government is running such a big deficit that the Treasury has to borrow all of the increase in the Social Security reserves--and a lot more besides--just to pay the bills.
It is not illegal for the Treasury to borrow from Social Security. On the contrary, the law actually requires the Social Security system to invest in government securities. If the government’s deficit were eliminated, the Social Security system would have to buy government bonds from the public (or banks or companies or foreigners), thus reducing the national debt. The system’s reserves would add to the pool of funds available for business and state and local governments to invest. Interest rates would fall, and more productive projects would be undertaken. The new investment would raise future national income.
Why not let Social Security finance investment directly by buying stocks and bonds in the market? Because that would concentrate too much power in the hands of the government. No good would come of making the government a big shareholder in private companies or the principal owner of state and local bonds. It makes more sense to use Social Security reserves to reduce the national debt and thus, indirectly, to release funds for new investment. The only way to accomplish this, however, is to reduce the government deficit.
Some say that reducing the deficit requires “cutting middle class entitlements,” by which they primarily mean Social Security. However, if Social Security benefits were reduced substantially, it would be only fair to reduce Social Security taxes as well. People cannot be asked to pay for benefits they are not going to receive.
This maneuver would not reduce the deficit unless lowering the Social Security tax made people more willing to pay other kinds of taxes.
Sen. Daniel P. Moynihan (D-N.Y.) is so put out with the Treasury for borrowing Social Security reserves that he advocates cutting the payroll tax (without cutting benefits) just to remove that tempting surplus. The result, however, would be to increase the amount the government would have to borrow elsewhere. Interest rates would rise and private, state and local investment would become more expensive.
But isn’t the payroll tax a regressive tax that is harder on low-wage families than high earners? There is some truth to this, but remember that the benefits are progressive. On balance, Social Security is a better deal for the working poor than for the rich.
In sum, Americans ought to recognize that Social Security works well and leave it alone. Instead of tinkering with Social Security, we ought to reform programs that don’t work and reduce the government deficit directly.
