Wednesday, June 15, 2005


Social Security Doesn't Age Well

IANAL (I am not a legislator) but it seems to me that one of the attributes of good legislation is that it should “age” well. Clearly Social Security does not fit this criteria. When it was originally conceived, it was a form of extreme old age insurance, to make sure that the small percentage of people who became decrepit from old age would not live out their last years in poverty. It was not supposed to be a national pension system. It was certainly not supposed to be a paid vacation for a large percentage of an otherwise healthy person’s life. The way I see it, there are two fundamental flaws in Social Security that come from the failure of legislators to take into account the effects of how circumstances change with time.

The first problem is described well by William Sterling in an article at TechCentralStation entitled From Piece of Mind to A Piece of the Action. If the goal of Social Security was to provide enough money for a decent (but not extravagant) living for the incapacitated, then you would except that the payments would be tied to the price of consumer products. That way, as inflation drove the cost of living up Social Security recipients would be able to continue to afford the same lifestyle. But that is not how the law was written. Instead, Social Security payments are tied to increases in the cost of labor. Because of increasing capital investments and technological developments in industry that continually increase worker productivity, workers get paid more and more every year. This increase in worker pay is generally higher than the increase in the cost of living. By tying Social Security payments to labor, the system is set up to provide a continually increasing standard of living for each generation of recipients.

The second problem is discussed by Glenn Reynolds in another article at TechCentralStation, and also brought up by an article in the NY Times by John Teirney.
Because the lifespan in the United States has increased faster than the retirement age of Social Security, many people are taking Social Security while they are still leading very active, healthy lives. As medical technology improves, this situation is likely to get worse. I’m sure the “me generation” of babyboomers will pour huge amounts of their (and through gov’t spending, everyone else’s) money into life extension technology in order to stave off their day of reckoning as long as possible. If these investments pay off with large increases in the human lifespan, then we could have the case where people are becoming eligible for Social Security while they still have more than half of their life ahead of them. Presumably these people would be healthy much longer into their old age as well, so they would be getting paid to indulge themselves in hobbies or recreation while they might otherwise have decades of productive wage earning ahead of them. Congress could always change the law to increase the retirement age, but they would have to do that each time a new medical breakthrough occurred and there would be considerable pressure from soon-to-be retirees against each attempt to increase retirement age.

The combination of these two failures of Social Security legislation to hold up over time make our current system terribly flawed. They mean that a program that was initially intended to prevent elderly people who could no longer be productive wage earners from living their last years in poverty will eventually become one that attempts to provide an extravagant lifestyle for the majority of most people’s lives. The AARP may claim that this is a “feature not a bug”, but measured against the stated aims of the original program I think we have to conclude that the legislators have done a bad job with how they enacted Social Security.

Fixing much of what is wrong with Social Security could be as easy as getting rid of these two problems, and then letting the (hopefully) continuing increase in worker productivity outgrow the costs. Tying benefits to the cost of living is easily done. Tying the retirement age to life expectancy would be a little harder. Unlike inflation, I don’t know of a good source of life expectancy estimates that are produced regularly. A government office could be set up to produce regular life expectancy reports, but I wonder if it would become politicized. Even if the annual estimates are politicized, the information gathered every ten years in the census would be a count instead of an estimate and so it could serve to “recalibrate” the annual life expectancy estimates and remove whatever errors had accumulated in them. Making these changes would still leave at least one other big problem with Social Security, however. The excess revenue brought in by Social Security above what is needed to pay its obligations is too tempting a source of money for Congress, and they will probably always want to spend that money on pork under the guise of “borrowing” from it.

Considering that technological and social change is happening at a much faster pace now than it was last century, I hope that our current legislators pay more attention to how well their laws will age. I won’t be holding my breath, though.

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