Alice in Wonderland… or Is It Plunderland? The Generational Implications of Social Security Financing Policy and New Proposals to Expand Benefits

Abstract

The US Social Security pension system is not adequately financed to fully meet benefit obligations specified in current law beyond the early 2030s. This potential financing shortfall has been recognized for at least the past quarter century, but policymakers have done nothing to address it. The system is largely financed on a pay-as-you-go basis, so restoring financing balance requires that the taxes supporting the system be increased, the benefits provided under current law be reduced, or some combination of the two. The delay in addressing the system’s financing imbalances has resulted in shifting of costs associated with the pensions from older to younger generations. The analysis here explains how this works and provides estimates of the cost shifting that has occurred due to the delays in financing reform. It assesses how recent proposals to address Social Security financing shortfalls shift costs to future generations and depart fundamentally from basic principles on which the system was originally based.

TOPICS: Retirement, social security, pension funds, wealth management

Key Findings

• • Policy makers have known for more than a quarter century that Social Security is under financed and the delay in rebalancing its financing will dramatically increase costs for those now entering the workforce, those now entering kindergarten, and those not yet born.

• • From 1990 to 2012, median real incomes of the elderly grew 29 percent, while that of families of full-time, full year working families grew 2.3 percent raising questions about the equity of increasing taxes on workers to finance across-the-board Social Security benefit increases.

• • Public sentiment toward maintaining or expanding Social Security benefits at the cost of higher future taxes ignores the implications for and potential sentiments of the young and unborn people who will be paying the higher taxes.