Social Security: A Financial Problem or a Political Problem?

Economics Without The B.S.**:  Social Security:  A Financial Problem or a Political Problem?

[**  Double entendre intended.]

Social Security:  A Financial Problem or a Political Problem?

Another annual report on the financial condition of the Social Security Trust Fund has just been released by the Trustees and critics of Social Security would have you believe there is a financial problem.

The political leadership needed to manage the long-term sustainability of the Social Security Program has been lacking since the Reagan Administration last faced a similar crisis and made the necessary modifications after forging bi-partisan support.

Since the inception of Social Security from the New Deal of the 1930s, there have been critics of the program, mainly Republicans, calling it ‘Socialism’ even though the concept of social insurance was initiated by the bulwark of German conservatism, Otto von Bismarck, in the 19^th Century.  However, regardless of who was president or in control of Congress, no one has been able to undo the Social Security Program as it was initially designed as the American version of a social insurance program.  Among the ‘Greatest Generation’ that was alive when Social Security was instituted, this program was considered the third rail for politicians who would not support the program – if you criticized the program, you got burned at the next election.  But as this generation passes and younger generations inherit the program, the aspect of it being a third rail has diminished.  But the administration of the program remains in the political realm.

As social insurance policy, and not just a retirement program, the Social Security Program was designed to have all Americans participate in the Program but would primarily benefit low-to-middle-income Americans who are often in a negative net-worth status or have difficulty putting enough savings aside for life’s contingencies.  Social Security addresses this by being a forced savings program, not voluntary; and, by being a guaranteed benefit, not one that is subject to the risks of the marketplace borne by the individual participant.  By having all persons participate, but by being more generous to low and low-middle-class beneficiaries, Social Security has always been re-distributive in nature and progressive in allotting benefits, the sine qua non of social insurance.

The data that has been collected by the Social Security Administration, and other organizations like the Pew Research Center, have shown, over the years, that higher income households of seniors have a greater mix of assets and income sources and are less dependent on Social Security; and, as you go from higher income seniors to middle income and lower income senior households, the asset base becomes less to non-existent and the income streams become more dependent, almost totally dependent, on Social Security benefits.  While the three-legged stool of retirement planning has been used as an analogy – one leg (Social Security) as forced savings, guaranteed benefit; a second leg (company pensions in the form of Defined Contribution or Defined Benefit Plans) consisting of professional management; and, a third leg of personal savings and investments (e.g., an IRA, a second home, etc.) – higher income senior households have all three legs, middle income senior households tend to have two legs (although the adequacy of their company pensions have been questioned), and  low income senior households tend to rely almost exclusively on Social Security.

With this data at hand and the lessons of the third rail of politics, we now have old time critics disguising themselves as the modern day “Reformers” bringing to our attention one inadequacy after another concerning the viability of Social Security and how to rescue the Program before the Great Collapse.  The vicissitudes of their reforms are reminiscent of the bumps and grinds of a tease joint obliquely situated in a side alley from the main thoroughfare.  The actuaries of the Social Security Administration, who are responsible for providing guidance for the sound management of the Program, have often stated, through the decades, that the Program with modifications that have been historically made – raising the income cap, raising the payroll tax, adjusting the retirement age, recomputing the benefit formula, etc. – and, gradually phasing these in to avoid shocks to the people affected – can restore the system to long-term sustainability, make it economically and financially sound, and keep it socially responsible.

If actuaries can make that statement then why the constant outbursts from the “Reformers” and the “Progressives”?  Could it be because the administration of the Social Security Program is entwined in the political process?  And it is the bedrock of the progressive agenda instituted during the New Deal of the 1930s and still ever present today?  And because it is identified with the progressive era of the New Deal, in other words Democrats and a Liberal agenda, it gets stuck in the craw of political opponents to this agenda and its programs?  Stephen Goss, the Chief Actuary, has said repeatedly over the decades that it is the political inaction in making the necessary modifications that has been the main obstacle and primary reason for the present state of affairs regarding the outlook for Social Security.  You can go to the C-SPAN web site and search on congressional discussions on the modifications recommended for Social Security since the late 1980s when they know (and they actually mention it) what the Program would look like in the year 2000, 2010, 2020, etc.  They discussed how gradual changes over twenty years would bring the Trust Fund into sound financial standing.  They discussed it in the late 1980s, the 1990s, the ‘00s, and since.  They discuss; but, they did nothing – in the 1990s, the ‘00s, and since.

The Social Security Program is one of the few federal programs that has always had broad support among the people who label themselves as Democrats, Independents, and even Republicans.  Even among the different generations it receives broad support – even the young generations even though they don’t think Social Security will be around when they reach their retirement age.  This was true in the past during the 1980s.  Well now for those youngsters from the 1980s it is thirty years later and as they approach eligibility for Social Security retirement, surprise/surprise, they are among the biggest advocates for keeping the Program as it was intended.

If there are no changes to Social Security it will only have enough money to pay $.75 for each dollar of benefits by sometime in the 2030s.  Is there some politician who thinks they can get re-elected after they tell Granny that she is only going to get $.75 for each dollar of benefits?

We live in a society governed by a democratic process.  Social Security is a part of that democratic process.  It is up to each generation that participates in the Social Security System to either renew that support or find a different approach.  Political will is not just a test for politicians, but also a test for the people they serve.  Lead, and they will follow.