Modernizing Social Security

Certainly one important question raised about Social Security today is how to balance its finances. But it’s only one question. Social Security exists-or should exist-to serve people, and lately it’s been doing only a so-so job on that front.

Many of Social Security’s features were designed around a view of the economy and the family that is at least three-quarters of a century old. Congress spends tens of billions more every single year for the program, but few of those extra dollars address the needs of the poor or very old. Meanwhile, the program discourages work at a time when the labor force is growing at a slower pace, and it discriminates strongly against single parents, usually women.

Three major reforms are required to modernize Social Security: better poverty reduction, less discouragement of work, and fairer treatment of the family.

Poverty reduction. Consider: early in its history, Social Security brought many of the old out of poverty; today, its additional spending does little to help the poor and nearly poor. Instead, higher benefits every year are allocated across the board to all future retirees, and because we’re living longer, smaller shares go to those who really are old.

Establishing a decent minimum benefit would help address this problem, as it would set a base to which other amounts could be added if desired. Before tackling issues such as middle- and upper-class benefits and individual accounts, reformers from across the ideological spectrum ought first to set a base that would improve the quality of life for the bottom third or bottom half.

Higher benefits in older age and lower benefits at the earliest ages of eligibility are another way to address the poverty problems of the very old. Your 85-year-old neighbor is more likely than your 62-year-old neighbor to be unhealthy, vulnerable, and without a spouse to help with impairments.

Additional work. Consider: Social Security, like the rest of government, is largely funded by taxes paid by workers. Encouraging more work is the one reform alternative that is almost a magic elixir. At any given tax rate, it would allow:

• higher Social Security lifetime benefits for everyone (because of more Social Security revenues);
• much higher annual Social Security benefits (because lifetime benefits are withdrawn over fewer years);
• higher personal income (because of a higher GDP);
• and, significant income tax revenues for the rest of government, hence reducing the squeeze of retirement on other essential domestic programs.

Social Security’s early retirement age sends a signal to people that they are old (and elgible for “Old” Age Insurance) at age 62. Today, however, many people retiring at that age still have close to two decades, or around one-third of their adult lives, left to live. Many of your moms and dads have liveor are living a lot longer than your grandparents, and you are going to live, on average, a lot longer than they are.

Raising the early retirement age by itself doesn’t actually save Social Security any money, but people who wo onal income, pay additional taxes, and significantly increase their own living standards in retirement. Other changes in the retirement age can bein a way that, on average, increases lifetime benefits of the most vulnerable-the poor, the disabled, and the very old.

Social Security can also stop discriminating against-as a hypothetical-your fellow worker who works 40 years for an much lower benefits than someone who works 30 years for $40,000. Congress should also recognize that the current program discourages work because of its confusing rules on “earnings tests” (between age 62-66) and “delayed retirement credits” (age 66-70).

Fairer treatment of the family. Consider all of the following examples of the unfair treatment of families:

• A single head of household paying taxes and supporting children often recieves tens or hundreds of thousands of dollars less in lifetime benefits than spouses who do not work, do not raise children, and do not pay any taxes.
• A husband and wife who each earn $40,000 will receive tens of thousands of dollars fewer in lifetime benefits than a husband who earns $80,000 and a wife who earns nothing.
• A divorced spouse with nine years and 11 months of marriage gets nothing out of spousal and survivor benefits, while a divorced spouse with 10 years and one month of marriage gets expected benefits worth hundreds of thousands of dollars.
• Widows who dare to remarry can lose tens of thousands of dollars of benefits by remarrying someone who earns less than their late spouse did.
• Individuals (mainly men, for biological reasons) can generate tens of thousands of dollars of benefits by having children later in life (generally after age 40)–benefits not available to most people who raise children.

Most of these problems derive from a stereotypical view of the family that was never accurate and is increasingly out of date. The courts would dethis design discriminatory if private plans tried to adopt it.

Modernizing Social Security requires addressing these three basic issues of fairness and efficiency. Otherwise, Social Security reform will fail no matter what level of solvency it attains.