Evan Soltas has a post out today about generational warfare, in which he effectively advocates cutting Social Security benefits. Him and I had a little back-and-forth about this article before it came out, and he told me to blog my response to make it clearer. So here goes.
In his argument, Soltas groups Medicare and Social Security to make a point about old-age entitlement costs. That’s a terrible thing to do as their budget impacts are majorly different. Medicare costs are set to rise because health care costs in general are set to rise. You tackle Medicare costs by tackling health care costs. This is a standard line. I am not going to explain it here because it has been beaten into the ground already.
Instead, I want to focus on Social Security. Let’s start with facts. As blogger Evan Soltas pointed out in September of last year, in about twenty years, Social Security will face a budget shortfall.
Absent reforms, 2033 will mark the full depletion of the OASDI fund (including disability insurance), at which point all benefits will be subjected to an immediate 25 percent nominal per capita cut, which brings expenditures back in line with payroll tax revenues.
There are a variety of fairly trivial ways to close the shortfall, some of which Soltas details on that September blog post. My favorite option is to lift the payroll tax cap which currently exempts all income over around $110,000 from payroll taxes. According to the CBO, that would, by itself, close the coming deficit. So Social Security solvency is not a serious problem. Soltas disguises that reality by doing the now-tired trick of grouping Medicare with any other program in existence and then showing that, when combined, they generate massive deficits. The combined deficit of Medicare plus Social Security is high for the same reason that the combined deficit of Medicare plus Naming Post Offices is high. And just as Naming Post Offices is not a serious fiscal problem, neither is Social Security.
Beyond that though, I think Soltas (and almost everyone else for that matter) goes wrong in a much more fundamental way. People fundamentally misunderstand the nature of savings and retirement. Consider this vacuously true fact: no matter how much retired people have saved, when they are retired, they live entirely off of the production of the younger generation. We can forget this sometimes because we have a magical understanding of what money is, but it is true. If you are not producing anything, but you are still consuming, you are snapping up some of the product of people who are working. This is true whether you have piled away money or not.
Consider two different societies that are identical in every way, except in one the elderly piled away a bunch of cash and in the other they didn’t. In both societies the elderly are consuming 15% of the GDP, but in the first society they are handing over piled up cash to pay for that consumption and in the second society, they are just taxing working people to pay for that consumption. Now tell me: in which society are working people being deprived the most? Is it the first society where 15% of the working people’s product is being consumed by retired people or is it the second society where 15% of the working people’s product is being consumed by retired people? Oh wait.
It might seem like I am being tricky here, but I really am not. When you strip cash out of your thinking (something any serious person does when thinking about a macro policy issue like this), it is very hard to understand what Soltas is complaining about. This confusion gets even deeper when you start to imagine what his ideal world would have actually looked like.
As far as I can tell, Soltas would have liked those who are about to retire to have paid more money into Social Security. The first problem with this idea is that it wrongly conceives of Social Security as some sort of savings program where working people pre-fund their retirement. It isn’t that and it never has been. It is a transfer program, and believe it or not, it is possible for every generation to take out more benefits than they paid into the program without the program running out of money.
The second problem with this idea is that it doesn’t actually do anything meaningfully different than what has already been done. What would happen if, for instance, this current crop of retirees had contributed a bunch more money into Social Security during their working years? Well, the Social Security Fund would have taken that money and bought up Treasuries with it. Then down the line, to turn those Treasury bond holdings into Social Security checks, the government would have to tax the younger generation (or sell the bonds to them). This is absolutely no different in terms of transfers! This policy would require a transfer of money from the current generation to the retired generation. The money is being funneled from the younger generation to the older generation via Treasury bonds instead of payroll taxes, but the end result is absolutely no different.
As I mentioned at the very beginning: retired people live off of the product of working people, always and unavoidably. It doesn’t matter what sort of “saving” goes on. The underlying reality of what is going on remains unchanged even if you start introducing financial instruments and money into the picture. If you think old people should consume less, then just say they should consume less. But do it right. Don’t advocate for that with a faulty story about generational transfers. All retirement everywhere and without exception is built upon generational transfers.