THE URBAN INSTITUTE
2100 M STREET, N.W.
WASHINGTON, D.C. 20037
(202) 833-7200
C. Eugene Steuerle
Senior Fellow
DIRECT: (202) 26l-5545
Fax: (202) 728-0232
E-MAIL: ESTEUERL@UI.URBAN.ORG
WHITE HOUSE CONFERENCE ON SOCIAL SECURITY
FAR MORE THAN AN ISSUE OF SOCIAL SECURITY
Not Just Social Security
What is often labeled as the aging problem is far more pervasive
than Social Security. The issues are not just what can we afford
for Social Security but what should we afford, and how can we obtain
an adaptable and flexible government policy that deals with our
most important needs over time.
New Opportunities, New Responsibilities
Much of what must be addressed in Social Security and Medicare
derives from "good" things happening to us: longer lives and better
health care. But we have a budget that is geared to a mid-20th
century view of the world: an industrial economy, not a service
and information economy; an elderly population that used to have
lower, but now has equal or higher consumption levels than the
young; and workers who formerly retired when they were old rather
but now retire for almost the last third of their adult lives.
Where "bad" things are happening to us -- e.g., children unattended
by adults, failures of our educational system -- we claim that
commitments to growing retirement and health benefits mean we have
"more will than wallet."
Restoring Discretion to Voters and their Elected Representatives
Our laws now assert to all future generations that we know better
today how to spend almost ALL of the revenues they will have IO,
50, 100, or 200 years from today. Social Security and health
entitlement programs are scheduled to continue displacing most
discretionary spending over time. Revenues are growing and will
probably double in real terms over the next 20 years or so, but
essentially all of that growth has been precommitted. Never before
in the history of our country have so many commitments and so much
growth been scheduled in our laws for nearly an eternity -- and so
little left to the discretion of each generation.
The Crux: Fewer Taxpayers More Beneficiaries
What forces Social Security issues to a head is the scheduled
decline from a ratio of workers to beneficiaries of more than 3-to-l
to less than 2-to-l. This dramatic fall in workers affects not just
Social Security, not just Medicare and Medicaid nursing home care,
but everything from education to defense. In effect, despite the
extraordinary attention to issues of saving, the forthcoming
shortfall relates to the labor market changes and the scheduled
early retirement of so much of our "human capital." A vibrant labor
force is the main source of our productive strength, as well as
the taxes that support all government programs.
Current Levels of Benefits
Almost everyone retiring in the future is still likely to get as
high or higher lifetime benefits than those retiring today. Most
proclaimed "reductions" in benefits are really decreases in the
rate of growth in benefits. Even after reform, benefit packages
likely will be worth more than the package of about $1/4 million
in Social Security and $1/4 million in Medicare for an average-income
couple retiring today.
Promises Exceed Available Revenues
In a transfer system, fewer taxpayers and more beneficiaries mean
that extraordinary pressures on benefits and taxes cannot be avoided.
Today every three workers transfer about 20 percent of their taxable
wages to each single beneficiary. They therefore support each
beneficiary at about 60 percent (counting health and other elderly
programs) of their average taxable wage. If we accept the scheduled
drop to less than two workers, the beneficiary can be held harmless
only if the tax rate rises to 30 percent of taxable wages;
alternatively, the taxpayer can be held harmless only if combined
elderly benefits fall from 60 percent to 40 percent of the average
wage.
Added Workers Deter Benefit Cuts and Tax Increases
Outside of reducing benefit rates or raising tax rates, the most
direct approach is to stem the drop in workers to beneficiaries,
for example, by providing retirement benefits only for 15, 16, or
17 years of life expectancy. Fewer retirees in late middle age
deters annual benefit rates from falling in old age and tax rates
from rising for the young The double gain comes because later
retirement simultaneously reduces the number of beneficiaries and
increases the number of taxpayers -- not just for Social Security,
but for Medicare and other government programs as well.
Increase in Future output
Still another approach to reform is to try to increase future
resources by saving more. Given low national saving, these efforts
have considerable merit. However, government's ability to control
saving has always been weak: individuals can offset any government
action over in another fund or through other saving and borrowing.
Therefore, while there is merit in trying to increase saving and
for government to fund its future promises, the anti-poverty core
of the system cannot be made dependent upon the unknown success of
efforts to encourage or mandate saving.
Better Protection for the Poor Possible
It is possible both to provide greater protection to low-income
individuals and to rely more on individual saving accounts. The
trick basically is to bump up the minimum level of guarantees in
Social Security, while counting more on saving to supply growing
benefits to middle- and higher-income individuals.
(As part of the plan of the National Commission on Retirement
Security, I introduced a new minimum benefit that would increase
basic annual Social Security benefits for a significant percentage
of low-income individuals and practically eliminate elderly poverty
even before adding in any saving in individual accounts.)
Watch Out for Magic Money
Many proposals now on the table from all sides count on "magic
money." That is, they rely upon the government borrowing at a low
interest rate, and investing the trust funds or individual accounts
in higher-yielding stocks and bonds, and then making money out of
the arbitrage. They also add contingent liabilities of trillions
of dollars.
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