October 26, 2004

Collective responsibility  

The federal budget is headed for disaster. The deficit's as big as it's ever been, even with some expenses (like the little war in Iraq) left off-budget. Yes, payroll tax receipts by the government still exceed Social Security and Medicare benefit payouts, but the situation is projected to change quickly with the retirements of the first baby boomers. The situation is grim.

And it's not really being discussed. Sure, the Democrats have attacked the Bush administration for its failures to rein in spending, and occasionally someone mentions changes to Social Security. But unless you're a non-political figure (Alan Greenspan springs to mind here), mostly you're just saying that benefits won't be touched, that Americans can count on Social Security.

They can't. Social Security has to be changed, and it has to be changed fundamentally. The only real question is: how will we change it? Some have mentioned the possibility of creating private investment accounts to harness the power of the American stock market. Others are quietly talking about increasing the retirement age or reducing benefits in the distant future. But there are serious problems with both of these ideas. The first is probably not possible from a budgetary standpoint, since funds would have to be diverted from today's budget; the second requires a massive amount of political capital, since it means taking money away from younger generations. It's so much easier to leave this problem for later.

What can we do about this? Well, we can start by giving up the notion that Social Security and Medicare are about generational equity. This idea is deeply ingrained in the American psyche, thanks to the subtleties of social insurance rhetoric. Social Secrity and Medicare are, after all, entitlement programs. But where Americans see their FICA taxes as contributions into an account, the accounting folks at the Social Security Administrations are buying up government bonds with it -- essentially carrying the money out the back door to fill gaps in the general budget. When it comes time for Americans to retire, benefits are based on the taxes they have paid, but the relationship has never been linear. Each generation's retirement is paid for by the next.

There's a reason these programs were presented in terms of contributions and accounts: the architects were using this rhetoric to create a sense of entitlement in the public. This was a deliberate attempt to prevent later governments from taking away the benefit -- a lock on the refrigerator, so to speak. Now, Social Security is the most popular social program in the history of the country, and Americans guard their benefits closely -- which is why so much political capital is needed to change the program.

In all likelihood, this rhetoric did not anticipate the backbreaking budgetary dilemma faced by Social Security and Medicare today. The structural backbone of these pay-as-you-go programs is the provocative notion that economic and population growth will exceed interest rates over timeframes of thirty and forty years. As long as this is this is the case, payroll tax receipts in a given year should always be greater than the amount the population could have received by investing their contributions at the interest rate instead, which means Social Security experiences a permanent surplus. Unfortunately, population growth rates have not been so cooperative. And in the meantime, lifespans have increased, stretching the money out even more. The delicate balance between growth rates has been disrupted.

What should we do now? Americans most be educated about the true nature of Social Security. This means changing the rhetoric of social insurance to highlight the redistributions and generational contract and casting FICA as a tax rather than a contribution. Folding FICA into the income tax -- ie getting rid of FICA altogether -- might be a good place to begin this process. By changing Americans' perceptions of the program, the threshold of political capital necessary to enact changes can be lowered. Americans must come to view these programs as their collective responsibility for seniors rather than their individual responsibilities to themselves.

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