Commentary On Plans Which End Social Security

by JoeTheEconomist October 6, 2011 7:44 AM

Some people have come to the conclusion that the Social Security system cannot be saved.  They believe that Social Security is mathematically certain to fail.  Some analysis is limited to the size of the unfunded liability that exists today.  Others point out that the mathematics of the system are unable to succeed regardless of what we do to taxes and wages.

Our general opinion is that we should fix the structural problems within the Social Security system before we come to that conclusion.   But it is difficult to fault anyone who bypasses this step given the gridlock in politics today.  So the question is: what makes one plan better than another?

Our goal is to ensure that the system does not meet an unplanned end.  We believe the worst versions of this idea protect current retirees and those near retirement.  We believe that this approach has the greatest chance of creating an unstable end.  We believe that this approach will only foster inter-generational tension that will make Social Security a massive target , once the tension builds into a voting majority.  When that end comes, it will be swift and unplanned.

An unplanned end will have significant repercussions.  The lesson from the financial crisis of 2008 is that our economy is interconnected.  As one part fails, another part of the economy suffers.  When one bank failed in NY, an auto dealer in Georgia was forced to lay-off employees.  Social Security is more than a trillion dollar business, directly affecting more than 50 million Americans.  The interconnectivity of that failure will be much larger than that of the Financial Crisis of 2008.

We believe that the majority of these plans face a significant problem. Virtually all of these plans all depend upon young workers continuing to contribute to Social Security fully knowing that they will get nothing.   Today, Social Security taxes are loosely connected with benefits in the mind of the taxpayer.  Even if it is a terrible deal, workers believe that they will get something back.  The view of payroll taxes will change once we sunset the system.  The view will change from it is a bad deal to it is a tax. 

We envision that this change in perception will foster a considerable amount of inter-generation tension at the ballot box.  Every year, the voter's perception will get worse has you add young workers who experience a tax, and a declining number of people who still get benefits.  Voters will already blame retirees for the budget deficit that the workers have to support.  In conjunction, we envision Social Security coming to an unpredictable end as the most likely outcome.

Here are the things that we look for in a sunset-plan:

First, and most importantly, if these people are correct – and they well may be – Social Security is a national problem.  The solution must be passed on to all Americans; not a narrow group. 

Second, the shared-solution must persist over time.  We strongly believe that no voting majority should be able to insulate itself from the pain of unwinding process. If such protection occurs once, it will occur again once the mix of the majority changes.  The worst solutions imaginable are those that protect the beneficiaries today.  This will only shift the costs of dissolving the system to other Americans.  If the burden is placed on younger workers, we envision that they will become a voting majority overtime, and vote the whole system away.

Third, the solution should recognize that today’s workers have contributed significantly more to the system than any other generation.  Their contribution has largely created a pocket of lost-retirement savings.    

Fourth, in 2008, the nation learned about the interconnectivity of the economy.  The problem for the economy wasn’t the failure of one bank, but the failure of parts of the economy which failed because of the failure of one bank.  It is not possible to sunset a trillion dollar business without seeing connectivity to other parts of the economy.  The plans should take into account how sunsetting Social Security will affect other industries.

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