At the same time that we are seeing growing support for proposals to increase Social Security benefits it appears that we are witnessing another set of calls for generational warfare. The argument of the generational warriors is that the Social Security and Medicare benefits received by our parents and grandparents pose a threat to the living standards of our children and grandchildren.
The generational warfare argument may not make much sense, but many people with money stand behind it. Therefore we are likely to hear it frequently in the months ahead.
The basic facts are simple. The country will see an increase in the ratio of retirees to workers over the next two decades, but it is not qualitatively different than the increase in the ratio that we have been seeing for many decades.
The Social Security trustees project that in 2035 there will be just 2.1 workers for each beneficiary. This compares to 2.8 workers for each beneficiary today. By comparison, the ratio of workers to beneficiaries was over 5.0 to 1 back in 1960. In short, we already have seen a much larger drop in the ratio of workers to beneficiaries in the last five decades than the decline we face going forward.
Insofar as we would expect a lower ratio of workers to retirees to hurt living standards we would have already seen most of the effect. In fact, we are paying considerably more in Social Security taxes now than in 1960. The current tax rate is 6.2 percent on both workers and retirees; this compares to just 3.0 percent back in 1960. There is no remotely plausible story in which young people today will see anything like the tax increases faced by their parents' generation.
The first generations of beneficiaries did get a very good return on their Social Security taxes, but these people have long since passed on. The baby boomers will largely get a return that reflects what they paid into the program. The people claiming the baby boomers are getting a bonanza from their Social Security are either not very good at arithmetic or dishonest.
However the more important point is that the focus on Social Security taxes is hugely misleading. The next generation's standard of living depends far more on their before-tax wages than what gets taken out of their check for Social Security taxes. And here there is both good news and bad news.
The good news is that the Social Security trustees project that average compensation will rise by more than 60 percent over the next three decades. This means that for each hour of work in 2043, workers will get 60 percent more on average in wages and benefits than do workers today.
That's the good news. The bad news is that this figure refers to the average, not necessarily what the typical worker will get. In the last three decades most workers have seen little benefit from economic growth as most of the gains have gone to those at the top: CEOs, Wall Street types, and highly paid professionals like doctors and lawyers. If this pattern continues, then workers may not enjoy higher standards of living in 2043 than they do today.
But it is important to realize that the threat to future living standards comes not from demographics, the impact of a falling ratio of workers to retirees will be very limited even in a worst case scenario. The real threat to the living standards of young people is the continuation of the upward redistribution that we have seen over the last three decades.
This should have lead people to wonder why we hear so much about the retirement of the baby boomers threatening the living standards of young people. For example, National Public Radio recently ran a piece which seemed to be complaining that young people didn't resent their parents' Social Security and Medicare. MSNBC gave us a segment in which Abby Huntsman, the daughter of the unsuccessful presidential candidate, made bizarre claims about Social Security being an impossible burden for young people. And the Washington Post routinely uses both its news and editorial sections to hype the need for cuts to Social Security and Medicare.
There is a simple explanation for the prominence of the Social Security scare stories. There is a lot of money behind it. The one percent types, who have benefitted from the upward redistribution of the last three decades, find it very useful that national debate focus on $1,300 a month Social Security checks rather than the policies that made them incredibly wealthy.
People like Peter Peterson, who made his fortune on Wall Street, would rather not have public discussion focus on the tax loopholes that made his private equity business so profitable. Similarly, Washington Post owner Jeff Bezos, probably does not want much public debate on the fact that he made tens of billions by allowing people to evade state and local sales taxes.
The list goes on, but as long as the wealthy can focus public debate on retirement benefits for ordinary workers, they can keep the focus away from the policies that allow them to get rich at everyone else's expense. And the rich are prepared to spend lots of money to keep the public distracted. We can expect to see many more pieces about Social Security bankrupting our children.
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