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ISSUE GUIDES: Social Security

CONSIDER THE CHOICES

 

PERSPECTIVES IN BRIEF

Keep Social Security intact
Redefine the contract to make Social Security sustainable
Put Social Security taxes in private sector investments
Make economic security in retirement a personal responsibility

To ensure that Americans are able to retire with security and dignity, government must keep Social Security intact. Even if it requires raising taxes or reducing spending on other government programs, the promise of income security in retirement years must be honored. It is immoral and unthinkable to arbitrarily reduce benefits to older Americans because of the pressures created by a large number of individuals in the baby boom generation. In any case, maintaining this program over the long run requires only modest adjustments of revenues and expenses.
Flaws in Social Security can't be fixed with a little tinkering. To avoid stark choices early in the next century including sharp hikes in taxes and reductions in other government programs significant changes must be enacted to meet the needs of future retirees. The demographics of the baby boom generation and the smaller generation that follows it require pared down benefits and revised eligibility rules. Commitments to older Americans must not jeopardize other public needs. We will have to trim benefits, especially to those who need them least, and reverse the trend to early retirement.
Social Security benefits shouldn't be drastically altered, and retirement income shouldn't be made a personal responsibility. We should focus on finding a way to pay the benefits to which recipients are entitled. The key to making this program financially secure is to get higher returns on the taxes paid into Social Security. Rather than investing taxes in low-yield government bonds, the federal government should invest Social Security taxes in the private marketplace to increase the yield.
Social Security is fundamentally flawed. Modest reforms won't be sufficient to provide financial security for future generations of retirees. The Social Security Trust Fund should be replaced by mandatory personal savings accounts, which make individuals responsible for their own financial security in retirement. Mandatory personal savings accounts would either wholly or partly replace the current system, putting responsibility for retirement security where it should be, on each of us individually.

PERSPECTIVES IN DETAIL

Keep Social Security intact
Redefine the contract to make Social Security sustainable
Put Social Security taxes in private sector investments
Make economic security in retirement a personal responsibility


What should be done?

  • Keep Social Security benefits and eligibility criteria intact.
  • Make technical adjustments in the cost-of-living formula to more accurately reflect inflation.
  • Make minor adjustments to raise revenues such as increasing the earnings on which workers pay Social Security taxes, and taxing Social Security benefits the same way other retirement income is taxed.
  • Take measures to accelerate economic growth, which will increase revenues for retirement programs.
  • Scale back the cost-of-living adjustment and reduce benefits for upper-income retirees.
  • Gradually raise the age at which individuals qualify for full retirement benefits.
  • Gradually raise taxes for Social Security, which are paid jointly by employers and individuals.
  • Invest taxes paid into the Social Security Trust Fund in the stock market to increase the yield and provide sufficient funds to pay benefits to future retirees.
  • Make government responsible for covering the financial risk if the stock market declines.
  • Replace Social Security with mandatory savings accounts for each worker, into which individuals and employers would contribute. Individuals would manage the accounts to get the best yield on their retirement savings.
  • Through Supplemental Security Income and other programs, continue to assist poor retirees who are unable to make ends meet, or pay for the health care they need.


    • Arguments For This Approach

  • Social Security represents a right and a promise. Everyone who has paid into this program, regardless of income, deserves coverage.
  • The best way to maintain public support for Social Security is to continue to cover all of the elderly, regardless of need.
  • Social Security goes a long way toward keeping older Americans financially independent. If benefits were cut back, many retirees would be forced to live with their families or go on welfare.
  • Providing assistance to individuals who can no longer work or provide for themselves is one of the fundamental responsibilities of government.
  • Older Americans need these programs now more than ever, since private pensions are shaky and many have saved less than they will need in retirement.
  • Circumstances have changed drastically since Social Security went into effect. It's time to adjust benefits and eligibility criteria accordingly.
  • The current system is based on outmoded assumptions about who's old. There is no good reason to offer inducements to early retirement, or even to encourage most people to retire in their mid-60s.
  • Government benefits should be targeted to those who need them. Affluent retirees don't need public subsidies.
  • Unless benefits are reduced or taxes raised, these programs will be unsustainable, as fewer and fewer workers pay for more and more retirees.
  • It's the only practical and politically acceptable way to maintain Social Security benefits over time.
  • Since return on private investment has been substantially higher than the interest rate on government bonds, this approach is likely to generate much higher revenues.
  • By investing in the stock market, this plan would pump a huge amount of money into the private economy, stimulating economic growth.
  • This approach reflects America's traditional emphasis on personal responsibility and limited government.
  • Individuals would no longer be forced to pay taxes into a program in which they have very little confidence.
  • Under this system, retirees would have real security. They wouldn't have to worry about reduced benefits, higher deductibles, or the uncertainty of a government-run system that may not be able to meet its commitments.
  • The resulting increase in the nation's savings rate would strengthen the economy. Savings would be invested privately, helping to create new businesses and jobs.


    • Arguments Against This Approach

  • It's unrealistic to think that rapid economic growth will provide enough taxes to sustain benefits at current levels. Public policy should be based on prudent forecasts, not wishful thinking.
  • No one has a right to any specific level of benefits. Today, retired Americans get benefits two to five times greater than the amount they and their employers paid into the system, even allowing for inflation.
  • Unacceptably large tax hikes will be necessary if the cost of benefits for retirees keeps rising.
  • The federal deficit cannot be controlled without restraining spending for Social Security.
  • The promise of substantial retirement benefits has lulled many Americans into a false sense of security and diverted them from the habit of saving.
  • If benefits were reduced, many retirees would be in financial peril. Currently, half of all single women over 65 live on less than $12,000 a year.
  • It's misleading to focus on the ratio of workers to retirees. As long as economic growth is robust, the nation can afford current retirement benefits.
  • Scaling benefits to retirees' income will undermine support for Social Security, which is popular because it's a universal program. Furthermore, it would penalize people who have worked hard and been financially prudent.
  • Millions of Americans have made retirement plans assuming current benefit levels and eligibility criteria. It's a bad idea to change the rules in the middle of the game.
  • It's not sufficient to change benefits and eligibility criteria. To meet the needs of future retirees, the system needs to be radically redesigned.
  • The market may go down, jeopardizing the retirement income of millions of Americans.
  • If we switched to a system in which payroll taxes were invested by the federal government in the private economy, government would take on a new and unpredictable role as a huge institutional investor.
  • Currently, Social Security taxes are invested in federal bonds, helping finance government programs. If Social Security taxes were invested in stocks, government borrowing costs and the federal deficit would soar.
  • Providing for the needs of elderly Americans is a public responsibility. Individuals who are no longer in a position to work and earn a living need and deserve public support.
  • Switching to a private system would fray the common bonds that hold the generations together.
  • The transition to a self-financed, individually-managed retirement system would create an unmanageable burden on the first generation participating in such a system.
  • There is no realistic way to make the transition from the current system. There is no guarantee that private savings would cover retirement costs, especially when individuals make foolish or risky investments.
  • Low-income Americans would suffer under a self-financed system. Welfare would need to be expanded to cover this group.


    • QUESTIONS AND ANSWERS: HOW THE PERSPECTIVES DIFFER

    Keep Social Security intact
    Redefine the contract to make Social Security sustainable
    Put Social Security taxes in private sector investments
    Make economic security in retirement a personal responsibility

    Q: What is a likely cost or tradeoff of each course of action?
    A:
    It may be necessary to pay higher federal taxes or reduce public spending in other areas to cover the rising cost of Social Security benefits.
    A:
    If the retirement age is increased, Americans will have to stay in the labor force a year or two longer to qualify for benefits. Benefits for upper-income retirees would be reduced. Workers and employers would both be required to pay more in Social Security taxes.
    A:
    The market might go down, which would jeopardize the income of retirees.
    A:
    Individuals who make foolish or risky investments would lose their retirement income, and many poor retirees might fall back on welfare programs.


    Q: What is the main value expressed by each perspective?
    A:
    Providing income security to the elderly at public expense is a fundamental part of the social contract. If Social Security benefits are cut back or eligibility criteria redefined, that promise will be broken.
    A:
    We have to be prudent, adjusting benefits delivered by public programs to changing realities. Commitments to older Americans must not jeopardize all of our other public needs.
    A:
    Investing Social Security taxes in the private market is a prudent and promising way to pay for the benefits retirees expect from the government. This is the only realistic way to keep from trimming benefits or raising taxes, both of which are politically unacceptable.
    A:
    People shouldn't be forced to pay into a government retirement program that's highly uncertain. Providing for financial security in retirement is something individuals should do for themselves. This approach reflects America's traditional emphasis on personal responsibility and a limited government role.