Friday, January 28, 2005

Social Security: Fixing What's Broken

In my last post on Social Security, I explained the transition "costs" of privatization by using the analogy of three roommates renting an apartment. This same analogy can help understand what is really "broken" with Social Security, and how it might be fixed. (For goodness sake, don't listen to any of the politicians if you want to actually understand anything about it. The Republicans are using dubious projections of huge future shortfalls to scare people into taking actions that don't actually address the real problems, while the Democrats are insisting everything is fine so don't worry about that big iceberg up ahead.)

Basically, there are four things that impact Social Security: how much tax does each worker pay into the system, how much benefit does each retiree draw out of the system, how many workers are there compared to how many retired people, and how long are retirees living? The reason that there will be a problem at some future date if we don't fix the system is a combination of: retirees are living longer than they used to, we have fewer younger people than older people (that "baby boom" generation starts to retire in a few years), and the benefits are increased every year. But it's hard to conceive of whole populations and life expectancies and so on, which is why I like to boil things down to an analogy.

Consider our three roommates, who pay $400/month each for a $1200/month apartment. Now let's assume that at the end of the year, two things are going to happen: The landlord is raising the rent to $1400/month, and one of the roommates is moving away. The two remaining roommates basically have three choices:
(1) cough up $700/month each to pay the increased rent between just the two of them

(2) find two additional roommates to share the increased rent; or
(3) look for a cheaper apartment that rents for only $800/month
There's just not really any other way to make ends meet.

With Social Security, longer-living retirees and increasing retirement benefits are like the rent being raised. And the smaller number of working people compared to retired people is like losing a roommate. Likewise, there are only three basic ways to fixing the problem with Social Security:
(1) raise the Social Security taxes on workers (i.e., cough up more rent)
(2) increase the retirement age, which effectively increases the ratio of working people to retired people (i.e., find additional roommates to share the rent)
(3) decrease Social Security benefits (find a cheaper apartment)

You'll notice that "privatization" of Social Security is not among these options. As I explained in the previous post, privatization would be the equivalent of the landlord switching the terms from month-to-month in arrears to one-year-lease paid in full up front. Obviously, that would be no help at all to the remaining roommates in trying to deal with higher rent split among fewer people. That's because privatization won't do anything at all to fix what is broken with the system.

1 comment:

john said...

Tom...great analysis...

1. raise taxes...Republicans will never let this happen...I would support raising the cap on SS taxes from 90,000 to 120,000
2. increase the retirement age...this is the most sane and likely item to pass muster
3. decrease benefits...bush has de facto proposed this by intending to "re-index" benefits from wage increases to price increases (which in my opinion is the correct thing to do)...this CERTAINLY will decrease benefits (by about 25% for those retiring in 2045)...Democrats will try hard not to let this happen

as you indicate THERE IS NOTHING ELSE WORTH DISCUSSING! these are the only 3 choices...