Can We Maintain Social Security And Medicare Benefits?

Summary:  The supposed demographic crunch that will require us to reduce Social Security and Medicare benefits is a myth because of rising productivity. Nevertheless, we need to think about mechanisms for funding them as a the number of workers declines .

Productivity Increase Allows Living Standards to Be Maintained

This posting is a response to an article (see the link below) by the Center for Economic Policy and Research. The article that tells us convincingly that there is no demographic crunch coming to make a decent standard of living for retirees impossible. The "demographic crunch" is the fact that the number of workers per retiree is falling. In effect, fewer workers must support more retirees. The article shows that this trend is not new. It has persisted for decades, but as the number of workers has fallen in relation to the number of retirees over the last 50 years, there has been no drop in the living standards of either workers or retirees.  The reason why living standards have been maintained is not far to seek: productivity has risen.  Each worker produces much more than either of his grandparents did.  So, living standards can be maintained even though fewer people are working.

But The Payroll Tax In Its Current Form May Fall Short

Productivity increases may provide the wealth to maintain our living standards, but they do not by themselves provide an adequate funding mechanism for Social Security.  Social Security has always been funded through a payroll tax, and both employers and employees have contributed to funding Social Security through contributions which are set at a percentage of wages.  Unfortunately, in recent decades increases in productivity have not led to increases in wages.  On the contrary, real wages have fallen over the last couple of decades.  Another way of saying this is that, while workers are producing more, their share of the total wealth being created is falling, and because the workers' share is falling, Social Security’s share is also falling because it is a percentage of wages.

So, the Funding Mechanism For Social Security Must Change

In order for living standards for retirees to be maintained, there must be changes in the way that Social Security’s funded.  There are several possibilities.  One possibility is that we raise the wage limit beyond which we do not collect Social Security taxes today. In 2012, we collected the payroll tax that funds Social Security only on the first $110,100 of income. Income above that level was not taxed, but  we could collect Social Security taxes on all wages and salaries at every level.  We could also collect Social Security taxes on other forms of income including interest, dividends and  capital gains, which we do not do today.  There is a certain justice to this possibility because today those types of income represent a larger share of the total than they did when Social Security was created in the 1930s.  There are undoubtedly other possibilities beyond those that I have mentioned, but the key point to be understood is that while we do not lack wealth that we can use to provide a decent standard of living for retirees, we do have to think about the means by which we fund Social Security in order to make a decent standard of living a reality.  In any case, it is not acceptable for retirees in the world’s richest country to live in penury.

Link to the CEPR Article:
http://www.cepr.net/index.php/blogs/cepr-blog/the-nonsense-about-a-demographic-crisis?utm_source=CEPR+feedburner&utm_medium=feed&utm_campaign=Feed%3A+cepr+%28CEPR%29