A Little Perspective on Social Security

Courtesy flickr: angelic0devil6 Lucia Whittaker

During a recent road trip, I had an interesting chat with my buddy Phil. We were talking about the state of America’s despair, and I started taking a pretty hard-line stance on my opinions of social entitlement programs. During the course of the discussion, we talked a bit about the morality of social entitlements (a worthwhile debate in it’s own right), and we also discussed the economics. The two major programs we have today (in entitlements) that keep coming up are Medicare and Social Security. I was curious as to the nature of Social Security, so I looked up a bit more about what the program was designed to do:

On August 14, 1935, the Social Security Act established a system of old-age benefits for workers, benefits for victims of industrial accidents, unemployment insurance, aid for dependent mothers and children, the blind, and the physically handicapped.

via Our Documents – Social Security Act 1935.

These seem like fairly reasonable ideals for which to establish a social welfare program. Essentially, as the name suggests, a security system for those who would frequently be at a loss in society if they didn’t have any personal support system (namely: family, friends, or non-governmental groups like churches or non-profs). Even lightly applying a veil of ignorance to the country as a whole, it’s reasonable to say that we might want to have some money tucked away for people who are truly down on their luck, or have reached old-age with nothing to support a person who is no longer capable of working. Sure, I’m with ya.

So what went wrong?

My position is straightforward but a little morbid: The failure of Social Security (much like many retirement plans) is that it wasn’t pegged to lifespan. We’ve held a theoretical “retirement age” (65) that really has no bearing on reality anymore. It’s a little grim, but let’s face it: Social Security (at least, in the “retirement” aspect of it) was designed to only be used a few years.

How many years? (source at InfoPlease)

The lifespan of the average American in 1935, all races, all genders: 61.7 years

The lifespan of the average American in 2005 (70 years later): 77.8 years

Difference of lifespans: 16.1 years.

So yes, there’s a 16 year difference in collection times from when Social Security was enacted to today. And yes, the original social security age of retirement was 65. (source ssa.gov) So that means, in 1935, when Social Security was enacted, the government was significantly betting against the lifespan of the American people (truthfully, like all good retirement programs ought to), by an average of 3.3 years. As a proportion, they were building a program that assumed within 5.3% of the average lifespan for a payout. My guess is that standard deviations on ages are probably within 5-6%, so this makes a fair amount of sense. But for those skimming at this point, let me reiterate. The retirement age was 5.3% older than the age that an American was expected to live.

But let’s fast forward to today. Now, people are living to an averageof 77.8 years. That means, by this same proportionality, that social security shouldn’t kick in until age 81.9! If the original intent of Social Security were applied to today’s working people (as a portion of age to “age of retirement”), it wouldn’t kick in until people were 81.9 years old; 105.3% the current average lifespan – exactly the same mathematics that was in play in 1935.

That was the plan.

Now Social Security accounts for nearly 1/5 of our annual budget, the program is insolvent, and about the last thing a politician who wants to stay in office can do is vote against seniors. But the reality is that Social Security wasn’t designed to be your guaranteed retirement parachute; it was designed to provide a last-resort safety net to a small portion of the population.

I think it’s time that we as a nation take a serious second look at some of the social security reforms proposed back in ’04-’05. Though maybe with the total market tanking of the last few years, total privatization probably isn’t a popular notion these days either.

2 thoughts on “A Little Perspective on Social Security”

  1. You may want to adjust your math to include infant mortality rates. In 1930 the infant moratlity rate for whites was 60 per 1000 live births and 99 per 1000 for blacks. This has dropped significantly today (5.7 per 1000 /14 per 1000).

    Also, Social Security isn’t broke. There currently is $2.7 trillion in the trust fund. Total outgo in 2010 was $706 billion, while the total intake was $788 billion. Currently the fund has enough money to pay all of its projected benefits for the next 26 years.

    1. Thanks for your feedback and insight.

      On the point of infant mortality rates; while I’m certainly pleased that they’ve declined so dramatically for both races, I’m not sure it has any particular bearing on a debate about Social Security age benefits. In theory, Social Security as a program should be agnostic as to how many people are alive. My argument simply addresses the lifespan of Americans (using gross mean data rather than fragmenting the discussion to gender & race) – using the original ratio of lifespan-to-age-of-benefit in an attempt to clarify what the original intent of Social Security was – and ultimately what was flawed in the system to begin with. Building a retirement program that fixes the “age of retirement” to an ever-older population can only mean an eventual turn from solvent to insolvent. If the program were designed to peg the age of retirement to the average age of the population, and then only become effective at 105% of the mean age – then the program would maintain it’s integrity regardless of lifespan. Statistical outliers would go both ways; some people would never receive a penny of social security funds while others would use dramatically more than the average (extremely long-lived). But fixing an age of retirement benefits means that as the lifespan increases, the payouts increase disproportionately. By pegging retirement age to lifespan, we would not only match the original intent of the law, but we’d also protect the solvency of the program.

      In regards to the fiscal well being of Social Security, I didn’t say that the system was broke today. However, the latest report from the Social Security office doesn’t bode well at all for the fiscal well being of the program in it’s current form.

      Source: Social Security Administration: http://www.ssa.gov/pressoffice/pr/trustee11-pr.htm

      And in terms of solvency, having a current surplus of $2.7 trillion is a great thing; but the problem (as the SSA report notes) is that the general trust fund will be exhausted in 25 years, and at that point the outflows will still surpass the inflows at an increasing rate. Just like with any other financial tightening – the right time to address the problem is when you have plenty of money – not when you’re up against a wall and your options are more limited.

      Reasonably, there are only 2 ways to fix the system. You can either increase the cost to workers, or your can extend the date by which the program pays out. My suggestion is that we should better reflect the original intent of the law by raising the retirement age and pegging it to the average lifespan of the American population. Of course, this couldn’t reasonably be done in one fell swoop. But a gradual transition towards a more appropriate retirement age would potentially save the program, give younger citizens more time to plan for appropriate retirement, and reduce the overall burden to workers.

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