Social Security: The Challenge of Financing the Baby-Boom's Retirement

This paper compares and contrasts the two visions of Social Security's future. Its object is to give readers the background they need to understand the arguments made by the two sides, and thus to follow the debate that promises to enfold at the national level in the next few years -- first perhaps in the confines of a presidential commission and later in Congress and the political arena at large. There is no mistaking what is at stake: a choice between pay-as-you-go and advance funding: between social and personal risk; between a defined-benefit and a define-contribution plan. At the outside, the choice is between a communitarian and an individualistic approach to the economic security of the elderly. If Social Security were to be designed from the ground up, the ideal approach may well not be today's program, which has its roots in the economic collapse and the widespread financial insecurity of the 1930s. The task ahead, however, is to make changes in existing institutions, taking into account their history and their effect on the financial planning and decision-making of individual citizens. And it is to make changes for which a consensus can be reached and translated into legislation. On balance, the conclusion is, the nation would be better off keeping Social Security much as it is today. If that is the choice, however, additional tax incentives to promote saving are in order. They would make for faster growth of the capital stock and productivity, and thus ease the transfer of income from a relatively small to a relatively large generation. Savings incentives would also help to soften the inevitably unpopular measures that will be needed to right Social Security's long-term financial imbalance. Financing Medicare and other publicly financed health programs for the elderly poses another, even larger, challenge. That is outside the scope of this paper. Policy decisions with respect to OASDI can be made on their own merits, as can those in the area of health care. Indeed, that is implicate on the separate trust funds set up for OASI, DI, and HI and in the different payroll taxes that finance HI and OASDI. It must be kept in mind, however, that the demographic forces at work in Social Security retirement are among those at work in the health care programs as well. The beneficiaries, more over, are largely the same. And, not least, they draw resources from a common pool.