Much of the wealth redistribution that Social Security causes has little rationale. For example, Social Security subsidizes people who work in covered employment for only brief periods, even if their earnings are quite high.
Also, the 50 percent benefit increase for spouses subsidizes "traditional" families, those with one breadwinner and a nonworking spouse, at the expense of two-earner couples and single people. Finally, the retirement earnings test and actuarial adjustments for early and delayed retirement subsidize people who retire at sixty-five and possibly earlier at the expense of those who retire later.
Each of these transfers alters the return to work and thus distorts people's decisions about when, where, and how much to work. There is much evidence for the view that Social Security has contributed to the sharp decline in labor force participation rates and in the average age of retirement for older men.
Michael Hurd and Michael Boskin, for example, concluded that the entire 8. Interest earned on trust fund assets is expected to defray a significant portion of the cost of future benefits. Some economists applaud the shift from pay-as-you-go toward partial advance funding as a fiscally responsible measure that will increase national saving and lighten the tax burden when the baby boomers retire.
Other economists criticize it as fiscal chicanery—a hidden redistribution of taxes over time. They argue that surplus payroll taxes are used to fund the general operations of the government today, in exchange for general fund financing of Social Security tomorrow, and that trust fund surpluses create no real saving and may result in substantial wealth losses for the economy as a whole.
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Who is right depends on whether the excess payroll taxes are being and will be saved and productively invested, or whether they are being used to finance current consumption by the government. Presently, any surplus monies are invested in new, special-issue government bonds. The trust funds are credited with a bond—an IOU from one part of the government to another—and the Treasury gets the cash, which it can spend like any other federal receipts.
Saving occurs only if the government uses the surpluses to retire outstanding government debt or to issue less debt to the public , causing the public to buy new private securities, thus increasing the funds available for investment. Advance funding, as currently conceived, is thus an indirect mechanism for adding to the nation's capital investment. But it can work only if Congress restrains itself from doing two things: That's a big "if. The budget reforms adopted in were touted for having dealt with these concerns head-on.
Previously, the Social Security surpluses were counted in determining whether the government met its deficit-reduction targets. Increases in the surpluses thus reduced the savings that had to be achieved in other programs. Social Security has now been removed from the Gramm-Rudman budget targets—and from the mechanisms that enforce those targets.
Also, new procedures make it more difficult to bring legislation to a vote that would undermine the financial condition of Social Security. Economists grounded in public choice theory, and therefore skeptical of politicians, are not sanguine that these new rules can keep Congress from spending the Social Security reserves for the next forty years.
The "enforcement mechanism" for Social Security is weak by design: In addition, the procedural "fire wall" for Social Security applies only to some legislation. Moreover, enforcement mechanisms are subject to change, as evidenced by two major revisions of the Gramm-Rudman law since Four central changes in our economic and social life since the thirties have altered the costs and benefits of Social Security, yet have had almost no effect on the design of the program.
These are the great expansion in employer-provided pensions and other sources of retirement income; the steady increase in life expectancy since , life expectancy at birth has increased from 58 to About the Author Carolyn L. She is also a member of the Social Security Advisory Board. Further Reading Barro, Robert J. Evidence from the U. The Uncertain Future of Social Security. Puffert, and John B. A Financial Appraisal across and within Generations.
The Relationship of Taxes and Benefits. Burkhauser, and Daniel A. The Crisis in Social Security: Chapter Social Security's Looming Surpluses: Prospects and Implications Prospects and Implications , edited by Carolyn L. Business and Environment Business History Entrepreneurship. Finance Globalization Health Care. Finance General Management Marketing.
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About the Author Herman B. Professor of Public Management, Eliot I. Snider and Family Professor of Business Administration.