Repairing Social Security

Most people, when asked the question “What is Social Security?” will usually respond by saying that Social Security is a form of government retirement assistance. It is much more than just that. For one thing, Social Security provides a source of income for those who are too disabled to work. Secondly, Social Security is a redistribution program. It redistributes income from unmarried to married couples, from single people to married people, and from the wealthy to the indigent, of which the latter I will focus. Privatizing Social Security will have unseen, negative consequences on the economy. As a result, Social Security should not be privatized.

If Social Security were to be completely privatized, how would the disabled, who are unable to work, be able to obtain an income in order to live? Would the disabled have to go onto welfare? Or would the government implement a new program to take care of the disabled?

I will first examine the welfare option. This option would be fruitless because under the current welfare regime, which is the Temporary Aid for Need Families (TANF) program, welfare recipients can only receive welfare benefits for a maximum of five years. Because of this, I will assume that the government amends TANF to provide an exemption for the disabled. I will also assume that tax rates remain constant. I will further assume that the level of non-disabled welfare recipients remains constant. My last assumption is that the block grants the federal government provides to the states under TANF will remain unchanged.

Keeping these assumptions in mind, what will be the result of Social Security being privatized? The first effect would be an increase in demand on the welfare system. This produces negative consequences of privatizing Social Security. These negative consequences will especially be felt by the states. There are two types of states I will consider: those states that are required to have a balanced budget and those states that are not required to have a balanced budget. In terms of states that are constitutionally required to have a balanced budget, such as Wisconsin, privatizing Social Security would lead to one of two things. In the first instance, the state will not increase its spending on welfare so that the share of welfare income among welfare recipients decreases, making them even worse off. In the other case, the state would have to cut spending in other programs, such as education, in order to maintain the welfare income of welfare recipients.

States in which there is not a balanced budget requirement have the same two options, and the same consequences, as states that are required to have a balanced budget. However, they also have a third option, which is a much freer ability to issue bonds. The problem with this option is that it increases the supply of bonds, which increases interest rates. This then produces a crowding out effect on investment. Theoretically speaking, this will last indefinitely. The reason is that, given that everything else is held constant, the state can only pay its bonds and the interest to those bonds by issuing more bonds. The result of this is that investment spending by both the consumer and the firm decreases due to the higher cost of investment (higher interest rates). The result of this is that capital (machinery, etc.) continues to depreciate, which leads to a loss of productivity, which leads to a decrease in wealth.

Now, I will assume that states can pay for the increasing cost of welfare only by increasing taxes. The result of this is a decrease in the amount consumers can spend and save. This can be particularly devastating to the economy since consumer expenditures are considered a driving force in the American economy. This has the effect of decreasing the consumers’ utility both in the current period and in future periods. At the same time, the wealthy are going to pay much more in income taxes than they would under the Social Security regime. The reason is under the Social Security regime, there is a cap on the amount of Social Security tax paid. This is not the same for income taxes. So, if income taxes increase by the same amount as was the Social Security tax rate, the wealthy would consequently pay more in taxes. Because, as it seems intuitive to me, the wealthy provide the vast amount of savings in the economy, this would increase interest rates as a result of a decrease in savings. This too will make it more difficult for firms to invest in capital. This leads to a decrease in efficiency and thus productivity, which decreases wealth.

The other option is for the government to set up a program that is similar to Social Security but tends only to the disabled. The benefit of this particular program is that it is less costly than the Social Security program. This seems to be the more viable option.

I will now analyze the effects on the elderly from privatizing Social Security. So, what will happen to those who have spent most of their lives in poverty and/or in the lower middle class strata if Social Security is abolished? Chances are this group lives from paycheck to paycheck. What this means is that a person/family uses each paycheck to cover the necessary costs of living. So, if a person/family are living from paycheck to paycheck, how will they be able to save for retirement? The fact is they cannot. Social Security is their only form of retirement. Abolishing Social Security will remove their only source of funds for retirement. The effect of this is that this group of people are forced to work well beyond their productive years. While they continue to work as they age beyond their productive years, they are becoming less productive. This affects the productivity of the firms for which they work, which effectively results in a decrease in wealth. This decrease in productivity also produces a cost on firms. This can then lead to those elderly being laid off. If this occurs, how will they be able to survive? Without exacting a financial burden on their children, they will either have to go on welfare or the government would have to set up a new program that tends only to the impoverished and the lower middle class elderly.

I will first look at the welfare option. As I have already mentioned, the group of people I have been analyzing have lived most of their lives in poverty or slightly above poverty. As a result, they probably have already been on welfare, and have probably received the maximum benefits allowed under TANF. (To reiterate, under TANF, welfare recipients can only receive benefits for a maximum of five years.) Again, how will this group be able to live? Now, if they are using welfare benefits for the first time while in retirement, what happens if they live longer than five years? Again, how will they be able to live? They cannot.

The other option is for the government to set up a welfare-like program for the elderly, or something that is similar to Social Security. The benefit of this is that if the benefits of this program are only to the group I have been discussing, then costs will be decreased as compared to the retirement benefits paid under the Social Security regime.

The effects of privatizing Social Security on the disabled and the indigent render that Social Security should not be privatized. Based on my assumptions, it seems that the best way to repair Social Security is to limit its benefits to the disabled and the elderly from the low and lower middle classes who lack the ability to save for retirement.