EASY FIXES, BEST DONE SOONEST:

The Straw Men of Social Security (Andrew G. Biggs, May 14, 2009, The American)

[W]hy should we fix Social Security today? Three reasons:

First, fairness: Social Security’s treatment of different generations of Americans is declining, such that those who retire in the near future will receive much higher benefits relative to their taxes than those who retire later. For instance, this study from the Social Security Administration shows that a typical couple retiring today will receive around a 2.3 percent rate of return from Social Security, while a typical couple retiring in 2050 will receive around a 1.7 percent return. Compounded over a full career of paying taxes, these differences amount to a lot. By acting today, we can lower returns a little for near-retirees so we do not need to hit future retirees as hard.

Second, economic efficiency: The necessary tax increases or benefit cuts I cited above are if we act today—and only if we act today. If we wait, the necessary changes will be larger. If we waited until the system became insolvent in 2037, we would need to increase taxes by around 3.9 percentage points, with further increases to come. It is a standard finding in economics that the “deadweight loss” of a tax rises with the square of the tax rate. Whatever we are going to do, it hurts the economy less if we do a little to every generation rather than hit certain generations a lot harder.

Third, uncertainty: People planning for retirement know that something will happen to Social Security, but they do not know what, when, or to whom. The sooner we act, the sooner people can adjust their plans to account for those changes.

Because of rising life expectancy generations ought not be treated the same. Retirement age needs to be raised as drastically as expectancy has gone up.

Posted by Orrin Judd at May 14, 2009 6:11 AM