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Monday, December 6, 2010

Our National Dilemma

Part I

One of the biggest dilemmas we face as a country is epitomized by the old story of The Ant and the Grasshopper.  In the infamous fable by the wise Aesop, the grasshopper plays all summer long while the ant toils every day storing up food for the winter.  Once winter comes the grasshopper finds himself without food and comes knocking on the ant’s door.  The story ends with the ant reminding the grasshopper that he played all summer when he should have been working, and she closes the door in his face.

His point is very well taken, but with all due respect to the venerable Aesop, the dilemmas faced by people cannot always be adequately explored with stories that involve insects and animals.  In the fable, what happens next with the grasshopper is not the ant’s problem.  This is where the charming parallel comes to an end.  While insects are allowed, nay expected, to behave in ways that instinctively protect their own quest for survival, humans are expected to have compassion even in cases where people are the victims of their own folly. 

The fact is we have made a decision as a nation (sort of) that we will not tolerate the laws of social Darwinism in this country.  The decision was due in no small part to the reality that not everyone who finds himself in the position of the grasshopper got that way by dancing and playing when they should have been working.  Some have made a sincere effort to set aside the supplies they need for the winter of their lives, but have come up short nonetheless.  Thus, the real tragedy of the grasshopper is that he stirs cynicism in people who would otherwise be more than willing to share what they have with those in need. 

My own grandmother was a poor farmer’s wife who was widowed fairly young.  Afterwards she went to work in a nursing home and this was how she supported herself until she retired well into her 60’s or perhaps her 70’s.  She lived frugally in a tiny, two-bedroom house in an area dubbed “shacktown” in Montana.  She outlived four of her five children but managed to care for each of them when they found themselves divorced and alone in their last months of life.  I never heard her complain about the cards that she’d been dealt.  She accepted the hardships of life with cheerful grace.  She lived into her early 90’s, and whenever I find myself contemplating the dilemma of Social Security I can’t help but think of her.  Despite her hard work and frugality it’s not likely that she could have saved enough for her retirement, meager as it was, and I suspect she got more out of Social Security than she ever was able to put in.  There are a lot of people like my grandmother out there. 

So with the solvency of Social Security being under threat, there are two questions that we must ask ourselves as a nation.  The first is:  Do we have the stomach to turn people out into the cold when they are too old to earn a living and haven’t saved enough, regardless of how they ended up there?   I think most of us, myself included, do not.  Once that decision is made then our path is chosen and the option of getting rid of Social Security altogether and putting everyone back in charge of their own retirement is no longer on the table.  If we are not prepared to let anyone suffer the consequences of their own choices, then the rest of us have no choice when it comes to Social Security:  everyone must participate.  So the next question is:  How do we structure a system that takes care of the elderly without breaking the nation? 

Part II

The first and most important issue to understand about Social Security has to do with productivity.  Just as it is a mathematical certainty that a certain level of energy is required to move an object, a certain level of productivity is necessary to finance each person’s retirement.  We cannot escape this fact, although that’s precisely what we’ve tried to do.

Prior to the days of Social Security, retirements were basically funded in one of three ways:  (1) people worked harder and/or spent less during their working years; (2) people worked to an older age; (3) people minimized the funds needed for retirement by living with family or by other means.  That type of extra productivity and/or conservation of funds was forsaken, however, once Social Security was implemented, which means that the program was deeply flawed from the very beginning.  In essence it was sold to Americans as a free lunch, but of course by now we all know that there is no such thing.  Under the system most people only partially finance their own retirement, and the balance is then supplemented by borrowing against the productivity of younger workers.  Over the years, as the average life span has been extended, the number of younger workers needed to supplement each retiree has grown exponentially.  This has resulted, of course in a fragile house of cards that is ultimately doomed.  If all of the younger workers stopped contributing tomorrow the system would collapse inside of two minutes.

I think it’s safe to say that what I and many conservatives find most objectionable about Social Security (aside from the fact that it’s even necessary), is this Ponzi-scheme structure.  It is immoral to prop up Social Security on the backs of future generations when doing so places their own retirement security in jeopardy.  In order to fix it we must do three things:  (1) change the way Americans think about Social Security; (2) re-capture the lost productivity that is crucial to a quasi self-funded retirement; and (3) accept the fact that a Social Security system requires the transfer of wealth.

Fixing the Social Security system is going to require great leadership and will begin with changing the way Americans view the system.    People need to be reminded that Social Security is, in essence, a form of insurance.  You pay your premiums but there’s no guarantee that you’ll be around to collect.  While I will certainly concede that this is not ideal, it’s a system I can live with as long as the solvency of the program can be guaranteed when it’s my turn to collect.  After all, while I may not be around to collect there’s also the possibility that I’ll live to be 102, in which case I’ll receive far more than I ever put in.  So like all insurance, it’s a gamble. 

Re-capturing our lost productivity will mean that most people are going to have to go back to the kinds of behaviors and sacrifices that were necessary to prepare for retirement prior to the implementation of social security.  This requirement was acknowledged by Obama’s “Debt Commission” when they indicated they would be recommending an increase in the retirement age.  Raising the age at which people qualify for retirement benefits will naturally force people to be more productive because they will be working longer or because they will be forced to save or conserve more to cover the gap if they prefer to retire sooner. 

The second way to re-capture lost productivity is to raise the tax for Social Security.  Whether or not this would be necessary would depend on an analysis of actuarial statistics and expected retirement payouts, but it’s hard for me to see how it can be avoided when I hear that it currently requires something like 16 younger workers to support each retiree.  Let’s look at the math for a minute.  If we assume that a person contributed $1,000 each year from age 20-30, and that their contribution increased by $1,000 for every 10 year period until they retired at age 70, that person would have paid a total of $150,000 into Social Security.  If he then receives a payout of $1,800 per month, that money would last for a mere 83.3 months or just under 7 years.  So it seems inevitable that people would have to contribute more than they currently do in order to approach a self-funding system, but once again this a natural means of inducing greater productivity as people will either need to increase their incomes to set aside the additional funds or they will need to live more frugally. 

The final leg of the plan is to acknowledge and accept that a certain level of wealth transfer is necessary for the plan to succeed.  This isn’t exactly new, as it has always been the case that some people have paid in more than others and that some will pay in and never collect; however, to escape the Ponzi system structure funded by future generations and replace it with a system funded by the current generation would seem to be impossible without increasing the burden on wealthier citizens or finding another source of supplemental revenue (but then again, this would also amount to a wealth transfer).  The key here, in my view, is to be clear that it is a wealth transfer, i.e. charity, not an entitlement based on some coniving politician's definition of "fairness."

There are some who would say that my position on Social Security does not comport to the labeling of myself as a conservative.  I disagree.  Conservatives live by certain principles, one of which is the notion of self responsibility but another of which is compassion for those who sincerely need assistance and whose lives may be in jeopardy without it.  So it behooves us, in times when we face conflicting principles, to find the best practical solution.  We are, ultimately, part of a society, and the elderly are in a unique and precarious situation due to the likelihood that they would be unable to support themselves if they don’t have enough savings.  

In sum, the goal of this plan is to put an end to the immoral and unsustainable practice of robbing from future generations to support today’s retirees.  It puts the onus back on each individual to step up and meet their own retirement needs by forcing them to maximize their input to the system, which is the key to any successful retirement program.  Finally, it requires us to openly acknowledge that Social Security has a wealth transfer component.  The honest recognition of that fact is, in my opinion, necessary to achieve buy-in from the wealthy and to stave off resentment from those who are awakening to the realities of the free lunch promises that can’t be kept.  No doubt there will be great ideas to add which would greatly improve this plan, such as allowing Social Security funds to be invested in order to grow the funds.  My mind is open to all kinds of suggestions but we must get the fundamentals right first.