Will Younger Generations Have Social Security?

The US Social Security program has been working well for more than ninety years. Founded in 1935, the program has successfully helped millions of retirement-age Americans and their families live better lives. However, the long-term solvency of Social Security requires Congress to implement reforms. Will they have the political will or the economic wisdom to make those changes?

In this interview for The Upriver Current, Glenn McMahan, editor at Upriver Press, discusses the new Upriver Press book Social Security for Future Generations with Dr. John A. Turner and coauthor Serena E. McCarthy. John has a PhD in economics from the University of Chicago and is director of the Pension Policy Center in Washington, DC. Serena is a senior research associate with the Pension Policy Center.

Glenn: Thanks for writing this important book. It really is a tour-de-force. Most books about Social Security are designed for people seeking help with personal financial and retirement decisions. Your book, by contrast, is designed to help lawmakers and policymakers, as well as engaged citizens, figure out how to sustain the program from impending insolvency. Despite this urgent need, you argue that our elected representatives shy away from making needed reforms. Could you describe the primary reasons for this hesitancy?

John: Thank you, Glenn. The first point we should make is that our book is focusing on Social Security benefits for retirees, spouses, and their survivors. The main issue concerning reforms that makes them politically difficult is that payroll tax increases and benefit cuts, which make sense from a financial standpoint to promote the long-term sustainability of the program, are unpopular with the general public. However, when asked to make a choice, people generally prefer tax increases to benefit cuts. Also, we propose some alternatives that could facilitate reform.

Serena: Policymakers who want to maximize their odds of getting reelected are reluctant to propose Social Security benefit cuts and payroll tax increases. It appears that they generally tend to be more concerned with their future political careers than with the future of Social Security. They figure that others will deal with Social Security later on, or maybe they assume that they can always reform it later, before a crisis occurs.

John: This problem, which may be described as policy inertia, has continued for decades. The last major reforms occurred in 1983, months before a crisis. We are hoping that the ideas presented in our book may help prevent a last-minute reform from happening again.

Glenn: The Social Security program has successfully helped millions of Americans for more than ninety years. Ninety years is a good run! However, I suspect that most Americans today no longer have any knowledge of what life was like for average Americans prior to the program’s inception. Could you share what you know about that pre-Social Security era?

Serena: Elder poverty was widespread, especially at the height of the Great Depression. At that point, older people facing financial hardship generally had to get help from their friends and family because relief organizations could not do much. About one-third to one-half of senior citizens were depending on financial support from friends and family.

John: Another difference is that people are living a lot longer now, and related to that they can claim Social Security benefits at an earlier age (sixty-two), when originally they had to wait until age sixty-five. As an example of this issue, President Franklin D. Roosevelt, despite having access to the best medical care available at the time, died at age 63, which at that time was too young to be eligible to receive Social Security benefits.

Serena: It was a very different time for average Americans, in terms of “safety nets” such as Social Security and other programs.

Glenn: Many critics of Social Security have claimed that the program is, for example, a Ponzi scheme. How would you respond to that?

John: Let’s begin with the definition of a Ponzi scheme. A Ponzi scheme is a type of financial fraud carried out by a criminal who is seeking an increase in personal wealth by defrauding unsuspecting participants.

Serena: Social Security is not an illegal Ponzi scheme. It is a federally run social insurance program designed for the greater good, which is keeping millions of older Americans from living in poverty. The pay-as-you-go aspect of the Social Security program is not a secret, even if not everyone understands it well enough. There may be persistent ignorance about how it works, but the way it is funded is not actively being concealed from the general public. Some people might think it is a Ponzi scheme because the current workers’ tax contributions fund the current beneficiaries’ benefit payments. However, this approach to financing benefit payments does not mean that deliberate deception is involved or that the program won’t be able to get enough funds to continue providing benefits.

Glenn: I want to ask you about the economic and demographic factors that make Social Security reform so urgent. Your book provides in-depth data and research about those factors, but perhaps you could share with us a few of the primary issues that concern you.

John: Population aging has been increasing the “old-age dependency ratio,” which is the ratio of Social Security beneficiaries to tax-paying workers. The old-age dependency ratio effectively acts like a price, making it more expensive for workers to provide the funds to pay the benefits of current beneficiaries.

Serena: In the past, there used to be more workers relative to each beneficiary. But with declining birth rates and the retirement of the Baby Boomers, the old-age dependency ratio has increased substantially over time. Life expectancy increases have also played a role.

John: The main economic factor making reform urgent is that the longer Congress delays reform, the larger the tax hikes, benefit cuts or other changes will need to be. There is an economic cost to Congressional delay.

Glenn: Your book presents nearly seventy economically sound and politically feasible proposals for reforming Social Security. Let’s hope our elected officials take the book seriously! Perhaps you could summarize the broad categories stated in your book’s subtitle: Sustainability, Equity, and Simplification.

Serena: Sustainability is the ability of the program to pay all scheduled benefits in full, on time, for the foreseeable future. The hope is that my generation (millennials) and the younger generations will be able to receive their expected retirement benefits. Financial projections decades into the future might not be perfectly accurate, but we still want to try to forecast whether the program will be in financial trouble in, say, the year 2050.

John: Equity is about the fair treatment of individuals regardless of differences in race, ethnicity, gender, marital status, income, and other factors. This is a valuable principle to consider when thinking about possible reforms because we don’t want Social Security reforms to disproportionately harm one group of Americans.

Serena: For example, if we reduced the future retirement benefits of single participants without changing the future retirement benefits received by married participants, that would be unfair, and not in alignment with our guiding principle of equity in Social Security reform. Moreover, simplification is also a key goal because Social Security is excessively complex with too many different rules. Even top experts on the subject may make mistakes or have some knowledge gaps. Making Social Security simpler and thus easier to understand will be helpful to Social Security Administration staff, policymakers, financial advisers, and all the participants in the program.

Glenn: I was particularly amazed by one of your proposals. You showed that there are nearly thirty million unclaimed or forgotten 401(k) accounts that hold $1.65 trillion. What is your recommendation for how those funds could help sustain Social Security in a fair way?

John: These retirement funds have already received tax subsidies in order to encourage their use as a source of income in retirement. Under the current system, these funds are effectively lost to the retirement income system. Under our proposal, once a certain requirement was met, such as that they had not been claimed by the time the owner turned age seventy-five, they would automatically be sent to the Social Security Administration to be used to support the Old-Age and Survivors Insurance (OASI) program.

Serena: Statistics show that it is common for workers to lose track of their retirement savings accounts. Many workers change jobs and move to different addresses over time. So it can be difficult for their former employers to contact them. Sometimes, workers are automatically enrolled by their employer in a 401(k) and are not even aware of it. In other cases, people may forget about old accounts from many years ago. I think, in their twenties, a lot of people are not really paying attention to saving for retirement. But if we are able to increase public awareness of this issue, maybe we can help people to reconnect with their unclaimed retirement savings accounts. 

Glenn: Could you describe a couple of proposals that would have the largest impact on long-term solvency?

John: Another of our proposals has to do with very large pension accounts. While the amount that can be contributed to defined contribution plans and IRAs is limited, there are no legal limits on the amount that can be accumulated in these accounts. Some wealthy people with access to investment options that are not available to most people have been able to accumulate very large sums in tax-favored retirement accounts, even into the billions of dollars.

Serena: For example, one famous billionaire in the US accumulated $5 billion in his Roth IRA, as of late 2019. He put it under the management of a family trust company.

John: We propose placing a limit on the amount that an individual can hold in tax-favored retirement accounts. For example, a maximum of $5 million would provide a generous amount for retirement while at the same time excluding nearly all participants from the effects of the limit. We propose that the income taxes collected on the required withdrawals from large accounts be used to help fund Social Security.

Serena: Another key idea is that automatic adjustment mechanisms could have a very large impact on Social Security’s long-term solvency. Automatic adjustments to the program could help to overcome ongoing policy inertia. Other countries are using this approach, in which small, predefined modifications to the payroll tax rate or to benefit levels (or other program parameters) occur in response to a predefined trigger, such as a financial shortfall being projected. These little changes keep the program on track financially so big, drastic changes are less likely to be needed. It’s like having an automated system to slightly turn a car’s steering wheel in response to the bends in a winding road, making mini adjustments very frequently in order to accommodate the current conditions, so you are able to stay within your lane and avoid an accident.

Glenn: A number of economists have been publishing books about wealth inequality in the US. One book is Economics in America by Sir Angus Deaton. Upriver Press just released Inequality by Design. Many of your proposals show your concern for equitable reforms. In what ways is the current Social Security system unfair to many average Americans?

Serena: The highest earners’ benefits are quite high compared to most other developed countries. For example, they are much higher here in the US than in Canada. The highest earners are very likely to have other sources of retirement income so they are not relying on Social Security benefits alone to fund their retirement.

John: In addition to Serena’s point, we propose establishing minimum survivors’ benefits for the survivors of members of the military, police, and firefighters whose spouse dies in the line of service. There are many other examples related to equity in the book.

Glenn: I’d like to revisit the idea that Social Security reform is like a “third rail” for politicians, which is a reference to the deadly electrified rail that powers the DC subway trains. How do you think the book can help elected leaders make the changes that are necessary without getting “shocked” by their voters?

John: The book provides innovative ideas that differ from the traditional reforms that promote sustainability, which are tax increases, benefit cuts, and raising the retirement age. The new proposals are designed to help lawmakers overcome political inertia.

Serena: Some of this book’s innovative ideas could be included in a reform package that also includes traditional changes, such as tax increases and benefit cuts. Our new ideas could have a helpful impact on the financial shortfall so the necessary magnitude of the burdensome reforms known to cause financial hardship to people could be reduced.

Glenn: Your proposals will likely require some people to make some sacrifices. In your opinion, will the American people have the right mindset to support the needed changes?

Serena: I think that there could be mixed feelings among the general public, especially if benefit cuts or other policy changes are targeted to higher-income individuals.

John: While the need for ensuring the sustainability of Social Security should be clear to most people, the desirability of Social Security reform relating to equity may not be as widely appreciated.

Serena: Also, people’s attitudes toward particular Social Security reforms might depend on the extent to which those changes will personally affect them in desirable or undesirable ways. Some people are narrowly focused on their own personal finances, with little concern for anything else. 

Glenn: A lot of younger workers frequently express their views that Social Security won’t be there for them when they retire. What would you say to those people? Are you concerned that we could return to the hard times?

Serena: I am optimistic about the future of the program. This idea that Social Security won’t be there for you when you retire—that you will receive a total of zero dollars—is a common myth that inspires a great deal of fear. There is certainly some cause for concern about future benefit cuts, but the situation is not as awful as you might imagine. Even if the trust fund is depleted, you will still receive monthly benefit checks if you are eligible for benefits. After all, there are still going to be workers paying taxes, and the payroll tax revenues can fund benefits. So it’s just a question of whether you will receive the full benefits that you were scheduled to get or end up with reduced benefits. In my view, the worst-case scenario is that you will receive reduced benefits. But I don’t think that the program will fail to provide any benefits at all, and I don’t think Social Security will be eliminated by the government because it is a very popular program that voters of both major political parties tend to recognize as important.

Glenn: What are a couple of practical ways that all Americans help our elected officials implement Social Security reforms?

Serena: We all need to understand that changes to the age at which people retire are an inevitable consequence of increasing longevity. This isn’t 1935 or 1940. It’s the year 2026. Social security programs around the world are in the process of raising their retirement ages because people are, on average, living longer. Modernization of the Social Security program requires the adjustment of the retirement age in a reasonable manner in light of the changes that have taken place since the program began. Some countries have begun to use automatic adjustments to link the national retirement age to the national life expectancy.      

John: An important issue to consider relating to equity is that, in the United States, life expectancy has improved considerably more for upper-income people than for lower-income people.  A final point is that traditionally, most conservative politicians have tended to favor benefit cuts, while liberal politicians have tended to favor placing more emphasis on payroll tax rate increases. Americans should learn the positions on Social Security reform taken by their politicians and take that into account when voting.