Posner [Chicago]: Social Security Reform

Richard Posner, University of Chicago Law School:

"One of the commonest objections to President Bush's proposal for reform of social security is that there is no need to act now because there is no "crisis." Yet the same people who say this are wont to say that a weakness of government is its failure to take the long view. Politicians have a short time horizon because they have limited terms of office and are therefore reluctant to address a problem that lies in the future even if the problem could be solved more easily before it assumes crisis proportions. The increasing burden of social security, owing to the declining ratio of workers to retirees, is a problem easier to solve now than when a continued decline in that ratio (it was 3.3 in 1996 and is expected to be only 2 by 2030) brings on a fiscal crisis necessitating either steep tax increases or drastic benefits cuts (one form of which would be raising the retirement age), or both. In 1983 Congress raised the retirement age for full social security benefits from 65 to 67, thus reducing liftetime benefits. But the legislation provided for phasing in the increase over a 22—year period beginning in 2003, which made the discounted present cost of the reduction in benefits negligible for prospective retirees.

With the social security "crisis" still in the future, it is possible to begin now to change the system in the direction of a genuine retirement program, that is, one in which people pay for their own retirement rather than having it paid for by current workers. With that shift, it would no longer matter what the ratio of workers to retirees was.

The shift is independently desirable. Having people pay through the tax system for other people's retirement produces a capricious redistribution of income. The elderly have disproportionate voting power: a higher percentage of elderly than of other age groups vote, and they tend to focus laser-like on issues that affect their pocketbook.

The shift can be made painless to present and imminent retirees (anyone over 55, say) by keeping benefits at their current level. However, if younger workers are required to place a percentage of their income in a retirement fund, those who do not want to reduce their disposable income by that amount will perceive the requirement as an increase in their taxes, and will squawk. If to quiet them taxes are reduced, the federal deficit will grow because benefits are not being cut. Eventually, fiscal equilibrium will be restored, but until then, the political price paid for the reform may be high.

Deficit spending, financed by government borrowing, may be economically superior to higher taxes or inflation, but to the extent that the lenders are foreign, the payment of interest on the loans will transfer wealth from Americans to foreigners.

The issue of compulsory pensions should be decoupled from that of welfare. Some people cannot save enough to be able to retire on; the government should guarantee them a decent retirement income. Those are the only people whose retirement should be financed by other people, that is, by taxpayers. All others should be required to finance their own retirement. This applies to health costs as well as to other expenses of retirement. Just as social security should be for people who can't save enough to retire on, so medicare should be for people who can't save enough to buy health insurance for their old age. It is ridiculous that people with Becker's income or my income should be receiving social security and medicare benefits, except insofar as those benefits have actually been financed by our payments of social security taxes rather than by taxes on workers.

Extreme libertarians will challenge the assumption that people should be compelled to save for their retirement. They will say that people should be allowed to allocate their income over their life span as they choose; if they choose to allocate nothing to their old age, then let them starve. I do not agree with this position, and for two reasons. First, I believe it is plausible to model the individual as a succession of selves with different preferences. A young person may dislike the idea of growing old and may be inclined therefore to refuse to make provision for his old self. The old self—the self that will not emerge and "take over" the individual for many years—has no control over the decisions of the young self. Compulsory retirement saving gives the old self a "voice" in the decisions of the young self.

Second—and a point actually consistent with libertarian thinking—these improvident oldsters will in fact free ride on their children and grandchildren. This, however, suggests an argument (made in my book Aging and Old Age [1995]) for the existing pay-as-you-go system, as distinct from one in which people finance their own retirement. If by lifting the burden of elder care (or much of it, at least) from the shoulders of one's children, social security confers a benefit on the children, they should be expected to pay for it. A distinct but related point is made by Becker in his book A Treatise on the Family (enlarged ed. 1991). He points out that parents' payment of school taxes finances their children's education (and hence earning power), and social security can be regarded as repayment to the parents in their old age. The larger the family, the greater the aggregate benefits to the children of a "free" public education, but also the greater social security taxes they pay (because there are more of them). The benefit to the children of shifting the elder-care responsibility is probably independent of family size, since parents' need for such care is independent of the number of children they have.

But the matching of benefits and costs under the pay-as-you-go system is both very crude and highly politicized. Compulsory retirement saving would protect children from parental demands for old-age care; and education, like retirement, could be made self-financing, though with appropriate subsidies for children whose parents cannot afford to educate them." [February 6, 2005; The Becker-Posner Blog has the post]

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