The Economy: How to examine Social Security

Author: Andrew Cassel

Published: June 9, 2005

If we aren't getting any closer to resolving the Social Security issue, one reason could be that we're looking at it upside down.

That's not my analysis; it's from Eugene Steuerle, who has thought about the subject a lot longer and more intensively than you or I have.

Steuerle, a tax-policy expert who served in the Reagan administration and now works out of the Urban Institute in Washington, offered his take on Social Security to a congressional committee last month.

It's one of the pithiest statements I've seen on the subject, and well worth sharing with you here.

It's clear that President Bush's proposed overhaul of Social Security has gained little traction. Congressional Democrats detest the idea of using tax revenue to create so-called personal savings accounts. Many Republicans are reluctant, too, reflecting the public's ambivalence about tampering with the national retirement program.

Arguments have raged over whether Bush's changes would mean higher or lower Social Security benefits in 30 or 50 years. But to Steuerle, that's getting it backward.

The real issue isn't whether there will be enough money for future generations of retirees, he told the House Ways and Means Committee.

It's whether there will be enough for anything else.

Spending grows as needs fall

"Due to the ways we have designed our programs and our budgets, every year we spend greater shares of our national income in areas where needs have declined," Steuerle said.

Then we "claim we don't have enough left over for areas - such as education, public safety, children and antiterrorism - where real needs... have often grown."

Don't forget that, unlike the general federal budget, Social Security runs on autopilot. Congress decides every year how much to spend on defense, or research, or national parks; but retirement benefits grow simply as more people become entitled to claim them. (Hence the term "entitlement program.")

Better health and longer life spans mean those entitlements are growing faster than Social Security's founders ever envisioned, moreover.

From its original purpose - relieving old-age poverty, Social Security "has morphed into a middle-age retirement system," Steuerle says.

Americans already are likely to spend one-third of their adult lives in retirement. Instead of collecting Social Security for two years or five years after they stop working, the average American can now expect to receive checks for 17 years (for men) and 20 years (for women).

And it just gets bigger. In a quarter-century, nearly one-third of American adults will be collecting Social Security, according to Steuerle.

Two reasons this can't go on

Add in Medicare and other programs, and "we are approaching the day when the majority of the adult population will depend upon transfers from others for a significant share of its support," he said.

This can't go on, for two related reasons.

One is the drain on other programs and services. "By default, Social Security is designed to absorb ever-larger shares of our national income, thereby squeezing out other programs," Steuerle said.

Already we see Congress paring back such things as college scholarships because the ever-larger demand of entitlement programs leaves less and less room for other spending.

And two, Social Security sends millions of people the wrong signal about when to retire, thus depriving the economy of needed talent and resources.

When a worker retires, Steuerle notes, both national income and savings decline. That's increasingly wasteful, given the ability of many people to be productive well into their 60s and 70s.

"The primary economic problem for Social Security is to take advantage of the vast pool of human talent and capital that we are wasting," Steuerle said.

This is a much bigger issue than Bush's personal accounts. But it's one we'll have to grapple with if we really want to fix Social Security.