Social Security--A Labor Force Issue

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C. Eugene Steuerle is a senior fellow at the Urban Institute, codirector of the Tax Policy Center, and a columnist for Tax Notes Magazine. Any opinions expressed herein are solely the author's and should not be attributed to any of the organizations with which he is associated.

Note: This testimony is available in its entirety in the Portable Document Format (PDF).

SOCIAL SECURITY REFORM

Mr. Chairman and Members of the Subcommittee:

Thank you again for the opportunity to testify on ways to try to build a viable system of Social Security for the 21st century. As you have requested, much of my testimony will deal with our increasing inability to protect the young, the truly old, and the vulnerable when Social Security morphs into a middle-age retirement system.

As I have noted before the full committee a month ago, the legacy we are about to leave our children is a government whose almost sole purpose is to finance our own consumption in retirement. The impact on the budget is being felt already. Medicare and Medicaid long-term care are primary sources of this problem since they combine the old age problems of Social Security with the excessive cost growth that derives from an open-ended health care budget. But Social Security is the flagship around which the rest of the fleet hovers, whether it is old age health care insurance or private labor compensation schemes that the follow Social Security in encouraging people to retire in middle age.

Define "lifetime benefits" as the value, at age 65, of Social Security and Medicare benefits as if they were sitting in a 401(k) account that would earn interest but be drawn upon over retirement. In today's dollars, lifetime benefits for an average-income couple have risen from about $195,000 in 1960 to $710,000 today ($439,000 in Social Security and $271,000 in Medicare) to over $1 million for a couple retiring in about 25 years (over $1/2 million in both Social Security and Medicare—see figure 1). These numbers quickly reveal what is happening to the budget as a whole. We cannot provide a very large portion of American couples $1/2 to $1 million of benefits and simultaneously encourage them to drop out of the workforce for the last third of their adult lives without affecting dramatically the services that can be provided through the budget to our children and to working families.

These benefit are provided so early in life that many people are "tricked" into believing they will be well off in retirement when such is not the case. Income may appear adequate to a person at age 62 or 65 when in fair to excellent health and there is more likely to be a spouse around to help with minor impairments. However, twenty years or more later—and most couples get benefits for more than 20 years—the income is not enough. Social Security income falls relative to wages and living standards, private pension income often falls even in real terms (often because it is not wage indexed), earning power decreases, and there often is no longer a spouse around for mutual assistance.

Note: This testimony is available in its entirety in the Portable Document Format (PDF).

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