November 30 2011

Is the Coming Retirement Crisis Really Manageable?

Carrie L. Lukas

Nicole Gelinas has a fact-packed article in City Journal on a problem looming on the horizon for our economy and our countrymen. The ranks of the retired are about to swell, and most Baby Boomers haven't saved sufficient amount of money to support the lifestyle that they've been accustomed, want to continue to enjoy during retirement. In dissecting the extent of this crisis, Gelinas argues that the problems remain manageable, particularly if prudent steps are taken today and the economy gets back on track.

I agree with her assessment for the most part. I would note, however, that some of the problems look less bad when considered individually, than they do when seen as a part of the big picture. Gelinas quotes Brookings Henry Aaron, for example, who casts Social Security's problems as relatively minor and manageable since over the next 75 years, under current law, Social Security will take in about 14 percent of payroll and payout 16 percent. Making up for that two percent gap isn't the biggest hurtle we've had to cross, he suggests.

Certainly Social Security's financial woes pale in comparison Medicare's and Medicaid's, but it's a little misleading to just look at the 75-year funding gap when gauging Social Security's financial health. Social Security doesn't have a consistent two-percent gap over the next seventy-five years. The current gap is small and it grows overtime. By the end of that 75-year window, the gap in what Social Security is taking in and paying out is between 4 and 5 percentage points. And, unreformed, it will only get worse the year after that.

If Congress were to take measures today, it's far better that most of the programs' biggest problems lay ahead, so that adjustments can be made giving future beneficiaries time to plan. Yet does anyone really think that Social Security reform is imminent? The pessimist in me instead sees this time horizon as good reason to expect Social Security reform to be put off even longer.

Social Security's financial pressures will really begin and then grow at a time when we are already facing greater financial pressure from other sources—such as Medicare and Medicaid—so that coming up with any extra funding for Social Security will still present a real problem. It reminds me of how Democrats' current approach to every funding gap: Just tack on another tax hike on the rich or those making $250k.

That might work fine from an economic sense the first time, but you can't just keep raising marginal tax rates on high-income earners indefinitely. You don't have to be a supply-sider to understand that eventually people are going to stop earning that much income if government is simply going to confiscate it. Similarly, making up Social Security's two-percent-of-payroll shortfall may in itself be doable. But it gets tricky when you also have to make up for Medicare's shortfall, Medicaid's, and whatever other unsustainable entitlement programs that Washington dreams up.

Gelinas suggested solutions are all spot on: We need to start making changes now, encourage states to experiment with Medicaid's structure, find new ways to control costs without sacrificing critical care and services, and most of all, focus on our economy's fundamentals so we can get back on a growth track.

Our retirement problems may be manageable, but that's only if politicians actually start embracing positive reforms today. Sadly, knowing Washington's current track record, that's a very big if.

 

 

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