Wednesday, March 9, 2011

In Defense of Social Security

Social Security is a prime target of deficit hawks because it is some 20% of the federal budget.  Unfortunately, some of the deficit doves have also bought into the idea that Social Security should be cut.  We can expect that after any reductions in discretionary spending this year, Social Security will be an even larger portion of the budget next year and so, a bigger target.
Social Security is not a government spending program that directly purchases goods and services.  Instead, it is a transfer program that reallocates money from one consumer (wage earner) to another (recipient).  Properly managed this transfer consumes no net government resources and should be sustainable indefinitely.  For its entire existence since 1937, Social Security has been self supporting albeit with some adjustments along the way.  Only minor adjustments are needed to continue self-sustainability. 
To some conservatives such reallocation constitutes confiscation.  Consequently, they try to emaciate the program by associating it with the deficit.  It should be an issue argued on the basis of morality and national values.  Because the old will always be with us, they will, in any event, have to be cared for in one way or another.  
Social Security has been effective and popular, because it spreads the pain of providing for the old among a large wage-earner community not just those who have aging family members and possibly no family wealth.  To progressives this is an appealing view; to conservatives not so much.  
Social Security is a pay-go program meaning that payroll taxes on current wage earners support current recipients.  It is well known that in the future there will be fewer wage earners to support more retirees.  This is a tractable problem as long as the economy continues to grow.  Currently, Social Security takes up about 4.5% of GDP, and projections shown in the following chart indicate that it will peak at about 6% in 2035 and remain there through 2085.  A shift of 1.5% of GDP into Social Security is well within the means of this great country.  

Social Security and Medicare Costs as Percent of GDP

Because Social Security taxes are regressive, adding a small progressive touch would be sufficient to address any shortage of funding.  Social Security taxes are imposed primarily on those with lower wages, but only on that portion of wages under $106,800, and not at all on capital gains.  So, the rich win by having wages above the upper limit and by having a larger fraction of income as capital gains. 
Additionally, over the last three decades incomes for the rich have increased much faster than the rest.  Between 1980 and 2008, the top 10% (families with earnings above $109,000) enjoyed an income increase of 41% while the bottom 90% have seen only meager increases.  The kicker is that these income increases have been in capital gains or in wages above the maximum of $106,800, so they have escaped Social Security taxes.  The following chart is from Emmanual Saez.

Social Security should not be part of any deficit debate.  As long as Social Security  depends on the efforts of lower wage earners, it is an insult to the middle class to decrease their benefits and protect lower taxes for the wealthy.   

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