The Demographics of Social Security

Debates among the Republican candidates for the presidential nomination, especially Texas Governor Rick Perry, have been hammering Social Security lately, calling it fraudulent, unconstitutional, and a Ponzi scheme. At root, of course, there are really only two issues with Social Security--the age structure and Congress. The age structure matters because Social Security has always been a pay-as-you-go plan. Current income from payroll taxes pays the benefits to the current retirees. If there are plenty of workers for each retiree, then the tax burden on each worker is not too large. However, in the years since Social Security was passed in 1935, fertility has gone up, and then down again, while life expectancy at the older ages has pretty steadily increased. The result of low fertility and high life expectancy is the "bad curve" that was foreseen even by the writers of the original Social Security legislation--fewer workers per retiree. 


Congress has responded to this over time by increasing taxes on workers and by raising the age at which a person can begin receiving full benefits. But Congress has also made matters worse by not being able to keep its fingers off the surpluses that were generated during the time that baby boomers were making lots of money and were pumping much more into the system than was being paid out. That surplus was designed to hold off the day when the age structure would be less favorable--in essence the baby boomers were helping to pay for their own retirement, not just the current retirees, because the government was supposed to be saving those excess taxes. But the government (by which we mean Congress--not the President or some nameless bureaucrat) chose to dip into those surpluses for current spending on other things having nothing to do with retirement. At the end of the day, Social Security will have to be reformed and the reforms are well known--(1) raise the retirement age; and (2) raise the payroll taxes on workers, largely by eliminating the current ceiling on income that is taxed, which winds up increasing the taxes only on the higher-paid workers. This is a clear instance in which we can say that we don't have a spending problem--we have a revenue problem.