If we’re going to live longer, we’ll need it more than ever.
Photo by Mike Blake/Reuters
Social Security taxes people when they work and pays them a monthly
benefit when they retire. The amount of your monthly check is driven by a
formula based on how much you paid in Social Security taxes while you
were working. But the total amount of money you collect from Social
Security depends on both the size of your monthly check and how many
years you stick around to collect it. The impact of advances in life
expectancy since the 1930s on Social Security is often wildly overstated,
but future improvements in health that make three-digit lifespans
common could be very problematic as a matter of public finance.
And yet while increased longevity is often cited on these grounds as a reason to cut Social Security benefits, there’s a fundamental illogic to that inference. It’s like saying high crime justifies cutbacks in police departments, or rising birthrates should lead to teacher layoffs. Different public services serve different purposes. Social Security is the public service aimed at establishing a floor of living standards for the aged. If people live longer, that will put more strain on the service, but it also underscores its central importance. Sustaining the program over the long term probably will require some cuts, but looking to a cuts-only framework for Social Security is foolish. That’s especially true because the program actually grows less and less adequate as people age.
Your initial benefit level is pegged to the average rate of
wage growth since the peak of your earnings power. The idea is that
Social Security should allow you to keep up with the Joneses in terms of
overall national living standards.
But once you begin receiving benefits, your check is adjusted upward
each year by the inflation rate. Over time, wages and living standards
tend to grow faster than inflation—life gets better, in other words.
Social Security does not really allow the elderly to participate in
these rising living standards over long periods of time. If you begin
collecting a modest-but-meaningful check at 67, by the time you reach
100 its value compared with the average family’s income will have
diminished considerably. That’s why thoughtful Social Security reform
approaches, like the one Christian Weller devised for the Center for
American Progress in 2010, envision increasing the benefits for the very elderly.
The question of course becomes how to pay for a program adequate to the scale of the country’s needs.
Taxes are part of the picture, but one important idea should come to
us from a now-forgotten aspect of the debate over the Bush tax cuts.
Back in 2001, you see, then-Chairman of the Federal Reserve Alan
Greenspan endorsed a large cut in taxes on the grounds that the federal
budget deficit was becoming too low. Right now Social Security collects
more in payroll taxes than it spends in benefits, in order to anticipate
the eventual retirement of the baby boomers. But that Social Security
surplus is invested in federal government debt. These investments
produce a Social Security Trust Fund that in effect is more of an
accounting convention than an investment vehicle. Greenspan warned that
unless we cut taxes to increase the deficit, we might run out of debt
for the Trust Fund to buy, and it would be forced to move into other
asset classes, like owning stocks and corporate bonds. That, Greenspan
warned, would lead to all manner of political malfeasance in the private
economy.
With more than a decade of subsequent history under our belts, this
looks like excessive fear of socialism pushing the country into unsound
fiscal policy. And we should be open to the opposite conclusion. It’s
time to stop letting excessive fear of socialism block us from doing the
sensible thing and investing Social Security funds in private assets.
The spread of successful sovereign wealth funds from Persian Gulf
monarchies and Singapore to Norway and even Canada shows us that it’s
workable in principle. And any investment adviser would tell you that an
all-Treasurys portfolio is an exceptionally risk-averse posture—one
that individuals or institutions with long time horizons should avoid.
As the American government aspires to last essentially forever, it ought
to have a fairly aggressive investment portfolio.
The concern that such a fund’s clout would be put to bad political
purposes ought to be addressed rather than simply used as a
conversation-stopper. Rather than one gigantic fund, the government
could create 30 smaller ones to which citizens are randomly assigned. Or
the government could sponsor a discrete set of private funds run by
existing investment companies and let citizens opt into the one of their
choice. The name of the game is to avoid creating a single entity so
enormous that it dominates the marketplace, while still taking advantage
of the kind of scale enjoyed by major university endowments or small
countries’ sovereign wealth funds.
Longer life spans are going to make the basic promise of Social
Security both more important and more difficult to maintain. To get
there, we need to break out of the old mold and put the American
people’s money to work.
Matthew Yglesias is Slate's business and economics correspondent. He is the author of The Rent Is Too Damn High.
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