I have in this blog described Social Security as a very
federalist program. I believe this
because of the inter-generational quality of its funding. The fact that the current working population
pays the benefits of the preceding, retired population offers us a high level
of interdependence among our citizenry that underlines the federalist notion
that we are all partners in this project we call the United States. I have also observed in my postings that most
citizens don’t appreciate this quality; most just see it as a program that they
pay into so that at some future date they draw from – a forced savings
program. This is not exactly true. And it is becoming less true as time passes.
S. Jay Olshansky, Dana P. Goldman, and John W. Rowe,[1] in a
recent article, review some of the math involved in Social Security. The account gets a bit confusing – not their
fault, it’s just the nature of the thing – but with what figures I was able to
grasp, I would like to report some of the conclusions I think are
important. The article did not address
dollar amounts the SSA derives from payroll taxes it collects, but instead
shares figures relating to ratios and proportions of people working and
contributing to the program, life longevity figures, and proportions of working
to retired people.
The first conclusion is that not only are we living longer
and are living healthier longer, these numbers have shot up way above what was
anticipated when the program was first initiated back in 1935 – as part of the
New Deal of President Franklin D. Roosevelt – and even above what the Social
Security amendments of 1983 anticipated.
Healthcare advancements have been amazing, a good thing, but have led to
strains on the payer/beneficiary ratios.
Point of interest is that the original age for full retirement benefits
under Social Security was 65; this was because of the observation that in 1935,
most pension plans used that age as the retirement age. In 1983, as I just alluded to, Congress
instituted a set of reforms. Among them,
the law upped the retirement ages. They
set the age for full retirement, starting in 2006, at 66 and it will be upped
to 67 in 2027. Early retirement age, 62,
remained the same, but benefits were lowered.
Was this sufficient? One
way to measure whether the changes are sufficient is to look at what proportion
of the population, only including those who survived to twenty-five, were over
age 65 in 1935 when Social Security began.
If you take those percentages and apply them currently, since so many
people are living longer, retirement age should be 66.5 for early retirement
and 69.4 for full retirement. At those
levels, the program would be as fully funded as it was designed to be. Just to give you a flavor of the article, let
me quote part of it:
In 1935, assuming a full retirement
age of 65, the population aged 20 and older spent 78 percent of its remaining
life working. If we were to hold this
ratio of working to retired years constant and index the full retirement age to
rising life expectancy at age 65, the full retirement age would have been 69.1
years in 2009 (based on a ten-year moving average in life expectancy after 65 …). Assuming an early retirement age of 62, the
over-20 population in 1935 spent 74 percent of their remaining life working;
and the analysis … in 2004, would have yielded an early retirement age of 66.3
(p. 73).
Got that? No, don’t
feel bad; I’m sure few would, but these numbers reveal grave concerns over the
future of Social Security, but the problems are solvable.
Let me share some other numbers. In 1935, the expected number of years over 65
was 12.6 years; probability of surviving till 65 (conditioned on having lived
to 25) was 62.4%. By 1983, the number of
expected number of years above 65 increased to 16.6 years (increasing at a rate
of 30 days per year), while conditional survival to age 65 rose to 79.4%. Between 1983 and 2009, these numbers jumped
again. The number of years beyond 65
rose to 18.9 years (an increase rate of 31.8 days per year) and conditional
survival to 65 was then 84.8% between the years ’83 and ‘09. Another interesting set of numbers is: approximately 72 percent of retirees begin
receiving benefits before they are eligible for full retirement and 46 percent
begin receiving those benefits at age 62.
What seems to be a recurring aspect of this situation is that
efforts to draw conclusions and suggest solutions to the funding of Social
Security continuously underestimate the pace of how fast it is changing, how
fast life expectancy numbers are going up.
The article dedicates some space to the efforts of the Commission on
Fiscal Responsibility and Reform (the Simspon/Bowles Commission). Its analysis suggested, for example, that
full retirement age be set at 68 by the year 2050. Given the authors of this article’s analysis,
this would be highly inadequate. The
history of studying this concern, starting in 1935, has continuously not
grasped how successful we are in increasing life expectancy years.
These numbers are averages; not all people, of course, live
the same number of years. We know that
variance of life expectation varies according to certain factors. Gender, ethnicity, geographic area of
residence, employment, and others are such factors. It turns out that attained education level is
highly correlated to longevity rates. Of
course, in terms of causal effect, spending extra time in classrooms cannot be
reasonably adding years to one’s life.
But having higher levels of education, on average, opens individuals to knowledge,
life perspectives, opportunities, and lifestyles that do add years to life. At least, that seems to be the case. It probably also reflects family income and rates
of wealth. Here are life expectancy
numbers in relation to education: less
then 12 years of schooling in 1990, life expectancy was 75.7; in 2008 it was
74.5; for 12 years of schooling in 1990, life expectancy was 78.3; in 2008 it
was 78.7; for 13-15 years of schooling in 1990, life expectancy was 88.1 years;
in 2008 it was 89.2; for 16 or more years of schooling in 1990, life expectancy
was 86.0 years; in 2008 it was 92.1.[2] I think you would agree that these numbers
are stunning and reflect how unequal the realities of our nation are. But that is an issue for another posting;
here, the point would be that any changes to Social Security definitely need to
take into account these variations if such changes will be true to our commitment
to equality, a deep-seated federalist value.
Considering issues relating to Social Security is very important. Talking about it can easily become mind-numbing
given the numbers involved. One such
number is how much we spend on Social Security, the number one expense item of
the central government’s budget. Issues
include how the Social Security Trust Fund is the holder of enormous numbers of
IOUs from the Treasury Department. In
2011, that number represented about 2.7 trillion dollars. That is nothing to sneeze at. How do these rates affect the viability of
the cherished program? Questions of this
nature need to be addressed not only by our politicians but also our citizens as
well; they need to ask these questions and get their heads around the numbers
involved. Again, Social Security is one
of our basic federalist efforts; we need to protect it, not only for the sake
of our current and future beneficiaries, but also to protect who we are.
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