REFORMING PROGRAMS FOR THE ELDERLY, NOT JUST SOCIAL SECURITY

Only a broader approach to reform can address the many trade-offs required

Over the past few years, I’ve had the opportunity to review several Social Security reform proposals. When I’m asked for my opinion, I find myself in a difficult position. On one hand, I’m glad to see some people have come forward proposing benefit cuts and tax hikes to improve the system’s balance. However, every proposal I’ve encountered so far lacks a clear long-term vision for what our support system for the elderly should look like relative to other programs and the tax system that underpins them.

In a sense, Social Security reform requires performing a type of triage that includes a complete diagnosis of Social Security, a way to prioritize it relative to other programs, and a recognition of resource constraints. Social Security is one patient. Other programs supporting the elderly and non-elderly are the other patients.

The flaw in the reform process so far, at least as I see it, sometimes lies in proponents’ efforts to meet partisan goals. At other times, reformers jump directly into designing bipartisan compromises without first clearly defining the program’s objectives and the best ways to achieve them. Universal principles like equal treatment of equals (or equal justice) and efficiency, which are neither liberal nor conservative nor partisan, are rarely applied thoroughly to parts of reform plans.

Below, I outline four triage decisions that I believe can help lay a foundation for building the best possible Social Security system as part of a broader reform of elderly programs. They leave many choices unresolved, but, like a triage system, provide some guidance on how to prioritize.

Balance Between Social Security and Other Programs for the Elderly

Presumably, a major goal of Social Security, as Franklin Roosevelt emphasized, is protection against “poverty-ridden old age.” Another goal might be to provide a comfortable retirement, however that is defined. However, one cannot assess how well Social Security achieves either goal without considering the elderly programs as a whole.

Consider the connection between Social Security and health care provided through Medicare and Medicaid. Medicare benefits, which are growing faster per beneficiary than Social Security, will soon become the main source of lifetime support for most people. Think about all the links between cash and health care supports that make it hard to reform each one separately.

On the elderly benefit side…

• Controlling Medicare cost growth makes it easier to sustain higher Social Security benefits.

• As baby boomers begin entering their 80s and 90s, the demand for long-term care will grow. To determine whether Social Security cash benefits are sufficient, one must understand how much healthcare costs will be covered by Medicare and Medicaid. Conversely, to determine how much additional support is needed for long-term care, one must know the amount of available Social Security cash benefits that can help pay for those costs.

On the tax side…

• The level of benefits in Social Security and Medicare depends on the amount of revenues that fund them. The Social Security tax deducted from our paychecks is already shared between both programs. Both rely heavily on the same tax base.
  
  

• Sources of revenue other than payroll taxes will increasingly cover most of today’s Medicare costs and, likely, larger portions of Social Security. In the latter case, Congress may do so indirectly through methods such as one-time transfers of large sums, “loans” from general revenues, and additional income taxes on Social Security benefits. Medicare already obscures its true costs by drawing from multiple revenue sources. Doing so for Social Security independently would make it even harder to rationalize and reform our tax system.

Beyond Social Security and healthcare, many other government programs assist the elderly, including Supplemental Security Income for low-income seniors; SNAP (formerly Food Stamps); and tax subsidies for private retirement plans. Congress needs to give similar consideration to how these programs function as substitutes or complements to Social Security and to how they integrate into a comprehensive reform of elderly programs.

Level of Future Lifetime Benefits

Reform must address the rate at which lifetime benefits increase for the elderly. Focusing solely on future annual benefit levels often overlooks this issue. It avoids the critical question of whether more years of retirement at a lower annual benefit are preferable to using the same dollars to fund fewer years at higher annual levels. Choosing more years of retirement also reduces the number of workers who provide the revenue supporting each retiree.

Lifetime Social Security and Medicare benefits will exceed $1.3 million (in 2026 dollars) for average-income couples who retired in 2020 at age 65. When adjusted for inflation, this amount is twice what a similar couple received in the late 1970s. That figure is expected to double again to about $2.6 million for a millennial couple now aged 30 to 35. Roughly extrapolating, the total would surpass $4 million by the time my youngest grandchildren turn 65. If they earn above-average incomes, they could receive $5 to $6 million. Reform needs to decide how much emphasis to place on this kind of growth and whether it should remain the federal government’s dominant policy priority.

As I mentioned, give credit to reformers for engaging the discussion. Many agree to limit benefit growth. However, I challenge you to ask proponents whether they truly understand the lifetime benefits they are proposing, let alone what principles and goals have led them to choose that number.

Level of Eternal Promises

Eternal promises are inherently inefficient without crystal balls that can divine the future. They become more problematic when they contain requirements for eternal growth. For more than fifty years and into the indefinite future, Congress has scheduled both Social Security and Medicare benefits per capita to increase automatically faster than our per capita national income. That situation persists under the current law.

While I agree that some long-term commitments are necessary—such as providing retirees with certainty about their future annual benefits—I question whether Social Security and Medicare should be granted such automatic priority in the budget over items like education, children, worker supports, defense, or other government obligations.

More specifically, Social Security reform must be considered within the larger debate about how much mandated spending—expenditures that do not require new appropriations over time—should dominate the budget. High levels of mandated spending weaken fiscal democracy, in which options compete fairly, and each generation has a strong say in how the revenues they contribute are allocated. Our current lack of fiscal democracy creates a problematic political situation that compels elected officials to break previous promises to pursue new policies—one of the main reasons for Congressional weakness today.

Recall when the 1983 reformers established the modern structure of today’s Social Security system. For decades, the unrealistic promises they made then have complicated every attempt to improve the system’s sustainability, causing delays until just a few years hence, when the trust funds prove unable even to meet obligations to current retirees.

Balance of Benefits and Taxes Between Young and Old

When Congress first enacted modern programs serving the elderly, it transferred money from the wealthier, younger population to the much poorer, older population. Today, in many ways, the relative well-being of older people compared to younger people has reversed. CBO estimates that, in 2022, 11 percent of people in families with a head over age 65 were in the bottom quintile of the income distribution, largely due to Social Security and Medicare transfers, compared with 25 percent of individuals in families with children and 18 percent of non-elderly families without children.

To make matters worse for the future, the increase in Social Security, Medicare, and interest costs alone is set to swallow all revenue growth. Meanwhile, rising deficits fund every other spending program and add to our unsustainable national debt. The working class, the young, and programs that support their upward mobility have been among the biggest losers over recent decades and will continue to be so under the current law.

Again, this is not just a benefit issue. The higher the rate of benefit growth for the elderly, the more that new taxes are required to cover those costs. And the higher the priority given to using new taxes for Social Security and Medicare, the harder it becomes to use those taxes to address the nation’s deficits and programs for the non-elderly.

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In summary, Social Security reform should be part of a broader overhaul of policies for the elderly. This broader reform should include all programs that support older adults, identify and evaluate the appropriate level of future lifetime benefits to mandate, restore fiscal democracy by limiting the scope of eternal promises, and leave more decision-making authority to future elected officials. Overall, reform must also consider how much can and should be transferred from younger to older generations, taking into account the economy’s evolution, its future workforce, and the after-tax income available to those whose taxes fund these transfers.