The first thing I did when I returned home for the summer was to rifle through my mom’s purse. I quickly found what I was looking for—a long white envelope with a blue “NBER” printed on the top left corner and my first ever paycheck inside.
This summer I will be doing research at the National Bureau of Economic Research (NBER) in Cambridge, Massachusetts. I’m working for three professors: David Cutler of Harvard, Seth Richards-Shubik of Carnegie Mellon and Ellen Meara of Dartmouth. We’re looking at the effects of adverse health shocks on decisions to retire for the Social Security Administration (SSA).
So it was altogether fitting when I looked at my first check and found that the SSA had taken a small part of my income as part of the Social Security payroll tax. Funding for Social Security has been a hot topic in Washington for decades but is currently garnering more attention than usual.
There are a couple of reasons. To start, the nation is getting older—it’s estimated that the three workers who currently support every one retiree will drop to only two over the next few decades. Obviously, the burden on the working-age population is increasing because fewer people like me are entering into the labor force for every person who is exiting it.
Legally, all benefits from Social Security are supposed to come from the payroll tax. But Social Security is also an item included in calculating the federal deficit (though Social Security is not part of the federal budget), which means that another reason for the growing concern about Social Security is America’s growing debt. The debt problem does not have an easy solution, but diminishing revenue from workers will mean greater pressure on the government to rein in its debt (although Medicare is a far greater problem).
This could spell further trouble for an already worrisome debt load. If sources of revenue for Social Security remain as they are—which they probably won’t—it is estimated that the program could run out of money by 2038, according to a report by the Social Security trustees. That’s unlikely to happen because the system will have to be reformed. A lot of the debate in Washington today centers on this reform and there are many competing plans, all of which have some merit.
The most talked about reforms include cutting future benefits, introducing individual savings accounts and raising the retirement age. Cutting future benefits would prevent current workers from feeling the pressure of the U.S.’s growing elderly population—since payroll taxes would not increase—but would grant workers fewer benefits when they exit the labor force. They would need to alter their savings strategy accordingly.
The government could help. By introducing voluntary individual savings accounts with automatic enrollment, the government would give citizens the ability to save more for their retirement. Social Security has always been a supplemental source of income for the average American; it needs to be complemented by other retirement savings. Currently, about 60 percent of Americans nearing retirement age have Individual Retirement Accounts (IRAs)—like an employer-based 401(k) or 403(b) account—that will help them to continue a certain standard of living throughout their retirement.
I am about to open up a 403(b) Roth account through the NBER that will help me save for my far-off retirement. Soon, it’s possible that the government will offer a similar option to all of its citizens. Which brings me to the final reform being considered by policymakers—deferring Social Security payments by increasing the retirement age.
The retirement age is already mandated to increase to 67—one of the highest in the world—but there are calls to make it even higher. Analysts argue that this is good policy because people are living longer and healthier lives than ever before. But that’s only partially true. One of the goals to the research I am doing this summer is to find out if increasing the retirement age is a good policy—and a fair one. As age increases, so does disability. But what if disability is not evenly distributed among working populations? That would mean that increasing the retirement age is not the quick and easy fix that many policymakers think it is.
Social Security reform is a deeply political issue and one of great importance to the United States’ economic future. Some analysts claim that the system can be “saved” by cutting benefits, adding personal savings account, or increasing retirement age—and some combination of these is likely to be effective. As with any policy, there are likely to be distributional consequences. For example, increasing the retirement age may prove to place a larger burden on some ethnic or socioeconomic groups than others—the task for policy design is to figure out how to compensate the “biggest losers” so that they do not shoulder too much of this new burden.
Paul Horak is a Trinity junior.
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