Modernizing Social Security to Serve Younger Generations

When politicians strive to appeal to younger voters, they tend to promise help meeting large near-term expenses such as college tuition — while simultaneously backing policies that stealthily reduce younger generations’ incomes over the long term. A classic example is Social Security policy, where the young actually have greater financial stakes than anyone else. It’s well-known that Social Security has a financing shortfall that lawmakers must close. Less understood is that Social Security must be modernized if it is to fairly serve today’s young adults and those who follow them.

Americans instinctively think of Social Security primarily as a retirement program that shields the economically vulnerable from hardship after they leave the workforce due to disability or old age. However, Social Security redistributes income in other more significant ways — for example, across generations. As it happens under current law, Social Security will make those born in the 21st century substantially poorer than they’d be without it. Unless lawmakers fix this, Social Security will not be able to serve future Americans as it does today’s.

The basic cause is that Social Security is an income transfer program rather than a personal savings program, causing one group’s gain to be another’s loss. In addition, older generations generally receive more in Social Security benefits than they paid for with their own taxes. Lawmakers face the delicate task of spreading out other generations’ income losses as evenly as possible, so that no generation of Americans is unusually disadvantaged.

Unfortunately, under current tax and benefit schedules, Social Security would work out very badly for younger generations. Current and past generations receive so much more in benefits than they funded through their taxes that Social Security will make Americans entering the workforce today poorer by an amount equal to 3.4 percent of their career taxable earnings. Social Security simply cannot provide meaningful protections to generations from which it subtracts so much income.

Other analyses further demonstrate the problem. Under current law, medium-wage couples born in the 1960s and 1970s will make no net contribution to closing the Social Security shortfall, receiving (in present value) more in benefits than they paid in taxes. By contrast, a medium-wage couple born near the start of the 21st century will only get back roughly 90 cents on each payroll tax dollar.

The severity of these intergenerational income transfers undermines the intended progressivity of Social Security’s benefit formula. For example, although low-income workers typically get higher returns than others within their generation, that’s not always true across generations. The return paid to a couple born in 2004, one of whom earns less than half the average wage, is actually lower than that promised to medium-wage couples in late middle age today. In sum, Social Security is redistributing income from poorer, younger workers to better-off, older ones.

There is only one way to fix this: Current Social Security participants, including workers as well as beneficiaries, must help close its shortfall. Rather than having some generations come out ahead and others far behind, each living generation should make at least a modest contribution to closing the imbalance. If that’s done, we can provide a helping hand to low-income families of every generation.

We can’t go back in time and reverse the windfalls paid to Social Security’s first beneficiaries, which means we now share a substantial financing burden no matter what. But we can still keep the net contributions very modest for middle-income households, while asking higher-income households to shoulder much more, and still enable lower-income households to come out ahead. We just can’t protect future low-income Americans if today’s older workers don’t help at all.

What does this require in practice? It doesn’t require cutting Social Security benefits from today’s levels, but it does require moderating the rate of benefit growth in upcoming decades. We also can’t perpetuate technical mistakes (such as overstating price inflation when calculating cost-of-living adjustments) that exacerbate intergenerational inequities. Most especially, for generations already coming out ahead, it means we shouldn’t increase benefits even further above their prior tax contributions.

Some proposals to address Social Security’s financing shortfall wouldn’t fix its intergenerational inequities. For example, raising the future payroll tax rate would close the actuarial deficit, but only at the expense of younger generations who are already receiving poor treatment. The same is true of proposals to discharge Social Security’s “legacy debt” with general tax revenues and debt issuance, for which younger generations would ultimately pay.

Social Security’s financing shortfall must be repaired to avert its insolvency. Closing the shortfall, however, is not enough to ensure that the program serves future Americans well. Fortunately, all we need is for each generation to make our own modest, proportionate contribution to the solution. If we do our part, then Social Security can serve economically vulnerable Americans going forward.


Charles Blahous holds the J. Fish and Lillian F. Smith Chair at the Mercatus Center at George Mason University and is a former public trustee for Social Security and Medicare; his study, “An Analytical Framework for Strengthening Social Security,” is available at Mercatus.org.

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