Last Tuesday The Tulsa World ran a syndicated column by Caroline Poplin headlined “Social Security not behind our debt woes”. About a week earlier in the same space they ran a piece by Robert Samuelson in which he provided some data and logic that supported his opinion that social security was part of our problem. In the last couple of weeks on the national TV news reports we have had sound bytes from people who say social security is not part of the problem. Of course the TV news does not provide any of the logic that supports this position, so I was interested to see what Caroline Poplin had to say. I am not familiar with Caroline Poplin, but the information provided in the paper said she “is a physician, attorney and policy analyst”. Interesting combination. I’m not sure why her education background – though impressive – qualifies her to be a policy analyst on a subject that I believe to be primarily a financial and economic issue. But obviously the news paper thought she could speak for that side of the question, so who am I to argue.
The heart of her argument seems to be in the second paragraph where she says that although “deficit hawks” insist that we can’t afford the current level of benefits they are wrong. Why? Because it’s a benefit to most middle class Americans who need it and depend on it in their retirement. So we should “take Social Security off the table in this debate”. Now, I would hope that all the government expenditures are of benefit to some one and that they help people with their needs. But it seems it seems we can’t afford everything the government is trying to do, so we will have to reduce something that likely provides a benefit to someone. Filling a need or having a worthwhile benefit doesn’t necessarily mean that we can afford it. In fact, that is probably what makes cutting government expenditures difficult and painful. We are not likely to balance the budget and keep ourselves solvent without some pain – probably to large segments of the population. However if Caroline Poplin is aware of something that is of no benefit, she should tell us and make the process easier. We are all in this together, and it’s not likely that all will not feel some discomfort. So while I think Social Security is probably more important than some other things, everything should be “on the table”.
She goes on to imply that the existence of the Social Security Trust Fund along with the fact that the SS payroll tax is separate from the income tax should insure the future of Social Security without significant changes or reductions. She does rightly call contributions to Social Security a tax. And the federal government has other taxes that are not part of the “income tax”. But the Trust Fund is a “book account” that can be used to track whether the revenue collected is sufficient to cover the benefits paid out. But a book accounting tracking process doesn’t actually mean that there is real money in the account. We have in essence borrowed from that account to spend the money on other things. And as Robert Samuelson points out, the Social Security tax revenue is not covering the benefits paid out and isn’t expected to for the forseeable future. We are borrowing from and paying back ourselves – this would seem to be a “left pocket/ right pocket” type situation, and as such, not an argument that we can continue to afford to pay out benefits at the current levels. If this were a private pension program it would be making headline news for being severely underfunded. When the Social Security program was set up, the life expectancy of Americans was in the 60s, it’s now in the 80s. That is a major factor in pension plan calculation in determining what can be paid out or when, or alternatively, how much is needed to be paid in. We could get by with some underfunding when the working population was growing relative to the retired population. But with the retirees becoming a much larger percent of the total, the arithmetic changes. Another factor and a major difference with private pension plans is the inflation adjustment. In private plans, it is a flat payment which may be for limited number of years or at a lower level if it is for a remaining lifetime.
And speaking of private pension plans, the last part of Caroline’s piece addresses these. She says that retirement security in the past was considered a three-legged stool. Social Security, private pensions, and personal savings. My problems with her analysis are too extensive to go into in this post, so we’ll cover that in Part II of this discussion. But there is a point that should be made here. I think she’s right, we need a three-legged stool, and we are missing a leg. But the leg we are missing is not the private pension part she implies, it’s the personal saving part. In the 1960s the national personal saving rate was in the 9% to 10% of personal income. In the past 20 years or more it has been near zero. What we are talking about here is human behavior changes. Much of our behavior is based on expectations. When our expectations are that private pensions and Social Security will take care of us, we are not likely to save. Saving money is not as much fun as spending. She says that we can’t afford to save. We have one of the highest standards of living in the world. Over the last 30 years inflation has not been a substantial problem and real incomes have risen modestly. If we could save at 9 or 10% in the 1960s, we could also do that today without undue personal sacrifice. But we need motivation. We need to understand that we have to supply a part of our own retirement if it is to be a “comfortable retirement”. The people who will have difficulty with that are the ones near retirement who have not saved in the last 30 years. The longer one waits to start saving for that leg, the more difficult it is.
The proposed changes to Social Security do not eliminate the program, but modify it so that it can be “fully funding”. The longer we wait to start some of those things, the more painful it will be. My third “Rule of Life” is that there is no “free lunch”. We can postpone paying for it by charging it on our credit card, but the longer we wait to pay, the more it will cost us. We’ve treated Social Security like “free lunch”. We need to put it on a paying basis and change people’s expectations. We need to understand that it is not the only leg of retirement security that we will need. If we are going to modify the rest of our government welfare and benefit programs, it needs to be “on the table”.