The True Nature of the Social Security Crisis (Geocities Rescue)

Perhaps the most contentious issue in domestic politics is the reform of Social Security. Proponents of change point to forecasts that point to the need for benefit cuts or tax increases to insure program solvency. The Congressional Budget Office points to the increasing share that Social Security, Medicare and Medicaid require in the federal budget of the future. The real driver behind these trends is the aging of the Baby Boom generation. As this generation ages, it demands to use the Social Security benefits it worked for and the medical care to which it is entitled.

Proposed Solutions
Both parties offer various solutions. The President and the “free market” libertarians propose diverting a portion of Social Security payroll taxes to private investment in the stock market in the hopes that returns from the market will, in the long run, outpace the return on government bonds. Of course, this comparison is false, since the payroll tax is related to the performance of the economy as a whole rather than the performance of government financial instruments.

Defenders of Social Security point out that the real objection that the right has to the program is not its return, but its very nature as a redistributive social insurance program. In other words, they allege that the real goal of diverting private assets is to destroy the system, not to save it. Their defense has some merit. In response, progressives propose not only leaving Social Security intact, but increasing the income cap on contributions to capture as much of a share of national income as has been captured in the past (90%). Growing income inequality has left more wealth in far fewer hands, so to capture the same share of income, raising the cap is essential. Defenders of the program also offer their own way to increase national savings, especially among poorer citizens. Instead of redirecting payroll taxes, tax credits to establish savings plans are created so that individuals are forced, or at least encouraged, to save and invest in some form of index fund. In this way, even if no new taxes are raised, everyone has a nest egg to buffet them against the possibility of benefit cuts to Social Security. Investment of Social Security Trust Fund assets in the stock market was also explored for a time, although the tech bust and the return to deficit spending have put that talk to rest.

Similar Impacts
All told, there is not much difference between the solutions offered by the left and the right. The left proposes transfers form general revenues to increase savings while the President’s plan calls for a transfer of general revenues to the Social Security system for the creation of Personal Retirement Accounts (along with a cut in the payroll tax). The effect of this is not unlike raising the income cap on payroll taxes, because higher income individuals pay the lion’s share of the personal income taxes that finance the general fund. The President’s efforts at tax reform not withstanding, his economic advisors must know that cutting taxes further while increasing transfers to the general fund eventually lead a future Democratic president to increase taxes to make up the shortfall. It is simply a question of pay me now versus pay me later.

Likewise, the investment strategies are largely similar, especially if the White House submits Model Three proposed by the President’s Commission to Strengthen Social Security. This model includes an additional savings component, like the plan offered by the left. More importantly, both rely on the use of index funds, with proxy voting decisions left in the hands of fund manager who’s interest is the maximization of profit rather than the strength of the economy or the economic health of the workforce (whether domestic or foreign). Most importantly, both rely on either the performance of the stock market or the tax system to bolster the retirement savings of the Baby Boom. In another essay, I propose a better way to invest public retirement, union pension and supplemental savings funds by including employee ownership I address the difficulty of relying on enhanced savings for the retirement of the Baby Boomers here.

There is little difference between increasing taxes and increasing investment to provide for the increased needs of the Baby Boom generation. Relying on higher taxes by increasing the payroll tax broadly contracts the economy, as children work harder to pay for their parents and grandparents. Simply raising taxes on the wealthy, while attractive because it increases consumption and thus the economy, is likely not adequate to fully meet the enhanced retirement needs of the Baby Boom. Further, any solution that requires raising taxes now for future investment runs into the same problem as increased investment in the market: you can’t eat government bonds or stock certificates.

In the case of increasing stock investment, eventually the securities invested must either produce increased dividends or be sold in such a way that depresses the stock price. In this case, the worker of the future either works harder or has an increasing share of the wealth his or her labor produces go to the redemption of capital, leading to a lower wage. In the end, it matters little to the workers whether they pay higher taxes on a higher wage or lower taxes on a lower wage. The net wage they receive is about the same, and absent productivity gains, this wage is stagnant or decreasing. Of course, if productivity gains are assumed, then there really is no crisis, as the projected output of society meets the demand for goods and services. Let us assume for the moment, that productivity gains or the lack thereof are already part of the model that predicts the Social Security crisis, so productivity is not our answer.

Globalization Effects
Investing in the market does have one advantage that increasing taxes does not, the ability to rely on foreign labor without actually importing it. Globalization, where American firms exploit foreign workers on behalf of consumers, provides enough to the economy in the short run. In the long run, however, overseas workers begin to behave like their American counterparts. They gain a higher standard of living through work, demand more consumer goods and more social services and have smaller families. They eventually refuse to subsidize the American economy and then mimic it.

Addressing the Real Issue
If neither productivity nor globalization is the answer, what is? Simply put, the answer is a larger economy with more workers and more babies. The heart of the demographic crisis in Social Security is that the Baby Boom did not produce a large enough Echo Boom, at least not large enough to fund its own retirement. There are a variety of reasons for this, from the rise of women in the work force to the increasing cost of having a child with economic adolescence stretching into the 20s, to decisions to have less children or to forgo marriage and family entirely. None of this is news to anyone. What is news is that the solution to the Social Security crisis lies not in the financing of retirement but in financing childrearing and education.

The real solution to the demographic crisis lies in altering the tax code to increase the income of families through broadening the earned income tax credit for all families, regardless of income (either high or low) and making it creditable at withholding, essentially enacting a negative income tax. This is paid in one two ways. The first is to do so under personal income taxes. Doing so increases the direct role of government in redistributing wages, and is likely politically unacceptable for that reason. The second way is to end personal income taxation of all but the wealthy and shift the tax burden for wages to the employer under the Business Income Tax. Under this option, the same redistribution occurs, but it is less transparent to the average worker. This option leads to a shifting in how wages and taxes are distributed within companies, but does not change the tax burden for the average company, as the average employer has an average number of children supported by its output.

Finally, to make child rearing more attractive, the economic age of majority must be rolled back to the mid to late teens. At age sixteen or seventeen young people go into either vocational training or follow an academic track, with the key feature being that they are paid to do so and either the government, their school or their future employers bear the costs rather than their parents. Removing this long-term burden takes much of the fear out of bringing a child into the world, leading people to have more children and solving the demographic Social Security crisis once and for all.

The solutions I propose also offer a much better way to decrease abortion services than anything now offered by the pro-life/anti-choice forces. Providing for a higher income for every child and removing the fear of college costs takes away any economic incentive to have an abortion for already established families. Providing for the education and support of young adults also remove the negative impacts of early childbearing, again decreasing or eliminating the incentive for abortion. These impacts are important, because they add members to the coalition to pass these solutions that are not otherwise there. Conservatives think twice about rejecting these reforms if they are also a pro-life vote. Progressives are also hard pressed to stand in the way of proposals to enact a guaranteed income and a wage structure that empowers youth. Solving the demographic crisis takes the vitriol out of the funding crisis, making some form of compromise involving individual stock ownership and increasing taxes to fund the transition possible. Before we continue with Social Security, however, let us further discuss basic structural change to the tax code needed to end the demographic crisis.