Making Our Social Security System Sustainable

Our Social Security System is Unsustainable As It Is Now Structured

Our Social Security system is financially unsustainable because it is paying out more than it is taking in. Somewhere around 2033, beneficiaries will have their benefits cut unless we reform the system. Social Security is a PAYGO system in which the Social Security taxes paid by current workers fund the payments to current retirees. That works well as long as the number of workers is large compared to the number of retired people, but the number of retired people is growing much faster than the number of workers as our population ages, and that is why our system has become unsustainable.

When Social Security was founded in 1935, the number of workers was much larger than the number of retired people, and so, it made sense to base the system on the wages of current workers alone, but now the system is unsustainable. 

Why Do We Have a Social Security System?

To see how we ought to deal with this situation, we should go back to first principles and work from there. Why do we have a Social Security System? We have a Social Security System for the same reason that we engage in any economic activity. Why do we work to produce goods and services, and why does our government promote economic growth? We do these things to provide for our needs. We work to produce food so that we can eat; we work to build houses so that we can have places to live; we work to care for sick people so that they don’t die. We know that each of us will someday be too old to work, and so, we put aside a certain part of our income to provide for us when we reach that point. We do that as individuals and as a society.

How Can We Make Our Social Security System Sustainable?

Many Republicans want to tell us that we can no longer afford our Social Security System, mediocre as it is. They tell us that we must reduce the benefits provided to retirees because we cannot afford them. Their argument is that the Social Security Tax as it is now structured cannot provide the benefits that have been promised. They are right about that, but they ignore the fact that the Social Security tax that we pay does not define our commitment to provide for our old age. The tax is only the mechanism that we use to put aside money to meet that commitment. If the mechanism we are now using is inadequate, we should not go back on our commitment to provide a decent retirement for all. We should find a better mechanism for providing it. 

The system that we have now draws its income from taxes on wages and salaries but not on other forms of income. In the nineteen thirties it made sense to design the system that way, but it no longer makes sense today.  We can achieve a part of our goal of making the system solvent by taxing all wages and salaries instead of only those below a certain level, but that will not do the whole job. The number of workers needed to produce the goods and services that we buy is far smaller than it was in 1935. Moreover, We live in a time when a larger and larger share of our national income goes into returns on capital and a snaller share goes to wages. If our goal is to use a portion of our national income to provide for our retirement, we should ask ourselves whether income from capital should also pay Social Security tax.

We have determined that as a society, we wish to put aside a portion of our national income for supporting retired members of our society. If our mechanism for doing so is based on wages and salaries alone and the share of national income going to wages and salaries keeps declining while the number of retired people keeps growing, the result must be that the mechanism will fail eventually.

Investment Income Must Pay Social Security Tax

Fortunately, while the share of our income going to wages and salaries has declined, the total national income has not.  Our national income per capita is much bigger today than it was in 1935 , but the share of that income going to returns on capital has increased. We have plenty of income to support us in retirement, but we cannot do so by taxing wages and salaries alone. We must also tax the income from capital investment.

Our country today is much richer than it was in 1935 because the workers of today produce much more than the workers of the nineteen forties did, but the percentage of the national income that goes to workers has declined while the percentage going to capital has increased. That trend will continue as long as the return to capital investment is greater than the growth rate of the economy as a whole – a condition that has held consistently since the nineteen eighties. If we wish to have a sustainable retirement system, income from capital investment must pay Social Security Tax.