Could Social Security Support 150-Year-Olds?

What's to come?
Oct. 25 2013 7:08 AM

How to Make Social Security Last

If we’re going to live longer, we’ll need it more than ever.

Senior living in California
A pair of elderly couples take in the view in La Jolla, Calif., on March 8, 2012. To keep Social Security solvent as life spans increase, the United States should look to the sovereign wealth funds of nations from Singapore to Norway.

Photo by Mike Blake/Reuters

Social Security taxes people when they work and pays them a monthly benefit when they retire. The amount of your monthly check is driven by a formula based on how much you paid in Social Security taxes while you were working. But the total amount of money you collect from Social Security depends on both the size of your monthly check and how many years you stick around to collect it. The impact of advances in life expectancy since the 1930s on Social Security is often wildly overstated, but future improvements in health that make three-digit lifespans common could be very problematic as a matter of public finance. 

And yet while increased longevity is often cited on these grounds as a reason to cut Social Security benefits, there’s a fundamental illogic to that inference. It’s like saying high crime justifies cutbacks in police departments, or rising birthrates should lead to teacher layoffs. Different public services serve different purposes. Social Security is the public service aimed at establishing a floor of living standards for the aged. If people live longer, that will put more strain on the service, but it also underscores its central importance. Sustaining the program over the long term probably will require some cuts, but looking to a cuts-only framework for Social Security is foolish. That’s especially true because the program actually grows less and less adequate as people age.

Your initial benefit level is pegged to the average rate of wage growth since the peak of your earnings power. The idea is that Social Security should allow you to keep up with the Joneses in terms of overall national living standards.

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But once you begin receiving benefits, your check is adjusted upward each year by the inflation rate. Over time, wages and living standards tend to grow faster than inflation—life gets better, in other words. Social Security does not really allow the elderly to participate in these rising living standards over long periods of time. If you begin collecting a modest-but-meaningful check at 67, by the time you reach 100 its value compared with the average family’s income will have diminished considerably. That’s why thoughtful Social Security reform approaches, like the one Christian Weller devised for the Center for American Progress in 2010, envision increasing the benefits for the very elderly.

The question of course becomes how to pay for a program adequate to the scale of the country’s needs.

Taxes are part of the picture, but one important idea should come to us from a now-forgotten aspect of the debate over the Bush tax cuts. Back in 2001, you see, then-Chairman of the Federal Reserve Alan Greenspan endorsed a large cut in taxes on the grounds that the federal budget deficit was becoming too low. Right now Social Security collects more in payroll taxes than it spends in benefits, in order to anticipate the eventual retirement of the baby boomers. But that Social Security surplus is invested in federal government debt. These investments produce a Social Security Trust Fund that in effect is more of an accounting convention than an investment vehicle. Greenspan warned that unless we cut taxes to increase the deficit, we might run out of debt for the Trust Fund to buy, and it would be forced to move into other asset classes, like owning stocks and corporate bonds. That, Greenspan warned, would lead to all manner of political malfeasance in the private economy.

With more than a decade of subsequent history under our belts, this looks like excessive fear of socialism pushing the country into unsound fiscal policy. And we should be open to the opposite conclusion. It’s time to stop letting excessive fear of socialism block us from doing the sensible thing and investing Social Security funds in private assets. The spread of successful sovereign wealth funds from Persian Gulf monarchies and Singapore to Norway and even Canada shows us that it’s workable in principle. And any investment adviser would tell you that an all-Treasurys portfolio is an exceptionally risk-averse posture—one that individuals or institutions with long time horizons should avoid. As the American government aspires to last essentially forever, it ought to have a fairly aggressive investment portfolio.

The concern that such a fund’s clout would be put to bad political purposes ought to be addressed rather than simply used as a conversation-stopper. Rather than one gigantic fund, the government could create 30 smaller ones to which citizens are randomly assigned. Or the government could sponsor a discrete set of private funds run by existing investment companies and let citizens opt into the one of their choice. The name of the game is to avoid creating a single entity so enormous that it dominates the marketplace, while still taking advantage of the kind of scale enjoyed by major university endowments or small countries’ sovereign wealth funds.

Longer life spans are going to make the basic promise of Social Security both more important and more difficult to maintain. To get there, we need to break out of the old mold and put the American people’s money to work.

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