Social Security has always aimed to be a "replacement" for the wages which workers give up on the day they retire. It’s not a full replacement, and the fraction which it replaces for each individual is decided by a complicated set of rules. Still, the big picture is that as each year’s retirees ride off into the sunset, the pensions which they take with them are a fairly constant percentage of the nation’s total wage bill in a recent year. As we’ve noted before, this makes it hard to grow out of the "grey glut" problem, because Social Security pensions grow right along with the economic means which were supposed to make it easier to support more seniors.
Arithmetically, the problem could be fixed without giving up the "replacement wage" design: just start reducing the percentages, replacing less each year. It might even be possible to do this without reducing the absolute amounts which are paid from one year to the next. The object, after all, is simply to let the economy grow faster than the pensions.
Imagine, though, a steady succession of "notch baby" generations. Remember the "notch babies"? They were a few years’ worth of retirees whose Social Security pensions fell a little, in comparison with the retirees just before them. It was all due to a mistake: an amendment in 1972 made an initial effort to index benefits, but the formula made benefits rise faster than intended. So in 1977, the formula was modified, and workers who reached 65 in the years 1982-1986 received lower replacement rates than their friends and acquaintances just a year or two older. [24] By the end of that period, benefits were back up to where they’d left off climbing, and after that they started climbing again. On a graph, the temporary dip resembled a notch.
Actually, it was the preceding batch of retirees who received a windfall, rather than the notch babies who were deprived. Compared with retirees before the start of indexing, both groups did pretty well. The point is, though, that if you ever want to encounter an impassioned sense of victimhood, bring up the subject of Social Security with a "notch baby". People make comparisons, and judge the treatment they receive by what others have received — particularly the others who are most like themselves, which in this case meant those who had retired just a little earlier..
The "notch babies" were a serious political headache: for years after they retired, no "town hall" meeting on national affairs would be complete without an angry oration from a notch baby. Now imagine the same process institutionalized into a yearly aggravation: every year the replacement rate is lowered, and each year another cohort of retirees go away disgruntled. For what we seek to achieve, the amount of the pensions might not have to fall; it may be that they’d just stop growing. (Remember, the object is to let the economy outgrow the burden.) This is gentler than what happened to the notch babies. Nonetheless, human nature being what it is, there would be no lack of advocacy groups to advertise the discrepancy in replacement rates, and resentment would mount.
Now consider, instead, a more radical change: beginning ten or fifteen years from the date of reform, Social Security no longer attempts to replace any definite fraction of a new retiree’s lifetime average wages. Instead, it provides a real income of some fixed amount. (I want to stress here that it’s "real" income; the dollar amount does go up to offset inflation — but that’s all it’s scheduled to go up.) The amount is chosen to be livable, but not to keep better-off workers living in the style to which they’ve become accustomed. The amount is the same for everyone, regardless what they’ve paid into the system. The whole concept of the thing has changed: it’s not the backbone of everyone’s retirement plans, and not welfare either, but career insurance.
At first blush, this would seem to cheat workers who keep their nose to the grindstone and earn more than other workers. On further reflection, that isn’t necessarily so. If the benefits are fixed in amount, then workers’ lifetime payments into the system can have a cutoff point, too. The more fortunate workers would complete their payments earlier than others. Even so, they might pay more, altogether, than some workers who never reached the cutoff point. No matter, this is insurance; it pools the risk of career failure.
Insurance is not expected to reward everybody equally. Rather, it proves most "rewarding" to those who experience the calamity against which it insures. Owners whose cars are totaled in accidents, for example, collect money at the expense of those who get by with never a scratch. Ideally, it pays off only enough so that those who collect would rather the calamity hadn’t happened, while those who don’t collect are compensated by the ease of mind which they enjoyed while it was still possible that it might happen.
Can one’s working career be insured? A Social Security pension of fixed amount would do so, in effect. Workers whose careers succeeded would collect the pension, too, but might have to pay more for it than those who failed in life. The successful ones needn’t complain: no one can be absolutely sure how life will turn out, and all the time it was turning out well, they had the assurance of winding up with at least the Social Security minimum.
There are problems about forcing workers into the same pool with others whose prospects, insofar as they can be foreseen, are less promising. Still, this sort of thing always comes up in connection with insurance, and it wouldn’t be the first time the government ever forced people into a wider pool than they’d like. It helps if people are obliged to participate from the very start of their working days: this amounts to placing their bets while the outcomes are most in doubt.
There are also problems about the moral equivalent of arson: "burning down" one’s own career needs to be discouraged in some manner or other. Perhaps there must be a really low-level pension for convicted goof-offs. Social Security is for normally behaved people. Incompetence or handicap, of course, is to be distinguished from slacking. This is an administrative problem today, and it will be an administrative problem tomorrow and the day after. [25] Here’s a thought, however: the more modest the standard Social Security pension, the more people can truly earn it as of right, by the fruits of their labor.
The suggestion that the flat pension take effect ten or fifteen years after it’s announced is important: it gives present-day workers time to adjust their retirement plans and provide for whatever they need in addition. Workers who are already in the late stages of their career, and have been encouraged to stand on a certain rug, won’t have it pulled out from under them.
The lead time also gives the economy time to grow. The remaining reforms, if we want them, should be implemented sooner, so as to help that happen.
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