Social Security: The Broader Issues

I. Introduction Although a good deal of the public debate over Social Security concentrates on individual accounts - for proponents, the sine qua non and for opponents, the cum qua non of reform - I view that emphasis as highly misplaced. Fostering saving in Social Security is a worthwhile objective, but it is not the only, nor even the primary, issue affecting either the economy or the imbalance within the Social Security system. Broadly viewed, the Social Security "issue" concerns how retirement programs should relate to the larger question of how government can change to meet the primary needs of the people of different times. While the Social Security debate often narrowly focuses on how to design the system for retirees fifty or seventy-five years hence, I want to deal more generally with how our budget can adapt over time to meet the needs of all people over those fifty or seventy-five years. Right now, Social Security and other elderly programs have large amounts of growth built into them in fairly rigid ways. Legislators simply cannot create systems with that much built in growth without causing impacts far beyond the systems themselves. Here, I will devote myself to three major areas affected by the existing structure of growth in elderly programs. The first area is the budget. Built-in growth does not affect just future budgets; it is already a major factor affecting current budget battles. The second area is the labor force. Social Security now induces people to retire in what must be considered late middle age. If that trend continues as the baby boom generation retires, there will be a significant reduction in the percentage of the adult population that will be working. The third area is the needs of the elderly. Because legislators have set growth patterns in ways designed to address problems as they were perceived in the past, the system has become less targeted toward the most pressing problems of the elderly as time goes on. For example, for each additional dollar of expenditures it makes, Social Security is targeting smaller and smaller shares of benefits to either the poorer or the more needy among the elderly. However, the predetermination of growth rules makes change difficult. The structure of the existing system confronts politicians with the dilemma of reneging on some set of promises if they want to make the system better at meeting its basic purposes. II. Sources of Growth in Social Security and Health Benefits It will be helpful at the outset to take a close look at the ways that growth has been built into our health and retirement programs. There are four major sources of automatic growth in such programs: health program design, perpetual growth in annual benefits for new retirees relative to those already retired, longer retirement spans, and fertility changes that reduce the number of workers and output relative to retirees and benefits paid. A. Health Program Design While most of this paper focuses on Social Security, it is important to note that health care for the elderly faces most of the same built-in growth as Social Security, plus more. Public health insurance essentially adopted the model of private health insurance in its early phases of development only a few decades ago. Essentially, health insurance is set up so that when a patient sees a doctor, the doctor and patient bargain over what everybody else will pay. "Everybody else" includes participants in health plans or, in the case of public insurance, the taxpayer. Any system with roughly a zero price at the margin tends to create an infinite demand. In the case of health care, it also leads to a technology that tends to emphasize cost-increasing, rather than cost-- decreasing, improvements. The attempt, primarily private, to move toward health maintenance orgaizations, preferred provide organizations, and similar operations represents at its core an attempt to create an intermediary that has some greater concern over costs. …