We Must Touch the Untouchable

Here's a quick quiz for today: (1) Which age group in America has the highest per capita income? (2) Which age group in America has the lowest rate of poverty? (3) Which age group in America did best economically during the 1970s?

If you answered "those 65 and over," congratulations. The elderly in this country average $6,229 in income per capita—$335 more than the national average. Their poverty rate, after allowance for in-kind benefits, is just 3.3 percent—one-third that of the rest of the population. And while the average workers' real income has declined by 7 percent since 1970, Social Security payments have gone up by 46 percent in real terms.

You might think, therefore, that of all the so-called entitlement programs, those which benefit our nation's best-off citizens—Social Security and Medicare—would be among the prime targets for budget cutters. Yet somehow, the mere fact of being old is taken as an ironclad claim on other people's money.

It is, of course, true that elderly citizens vote more readily than those in other age groups. In fact, they constitute some 38 percent of those who actually turn out on election day. However, sheer numbers and interest-group politics are not a sufficient explanation for the untouchability of Social Security. It is considered untouchable because most people think it is necessary and valuable.

This belief rests on several mistaken premises. The first is the assumption that the elderly are poor. In fact, with Social Security and other age-specific benefits, they are actually better off than the rest of us, on average. And even if there were no public assistance to the elderly, 45 percent of those 65 and over would be above the poverty line. Nearly three-fourths of all retired people own their own homes, and half of those homes are fully paid for. According to Commerce Department figures, retired people need to spend less than working people to maintain a comparable level of living, because they don't have work-related expenses or as much need to save.

More important is the mistaken belief that Social Security recipients are merely getting back money that belongs to them, as if they had purchased a retirement annuity. Would that it were so! In fact, as we all now realize, Social Security is a pay-as-we-go system. The money taken in from payroll taxes is paid out that same year to those drawing benefits. Moreover, the Supreme Court ruled explicitly in 1960 that the government does not have a contractual commitment to retirees; they are entitled only to whatever benefit levels Congress may from time to time decide upon.

But even as a matter of mathematical equity, aren't people entitled to the return of an amount equivalent to what they paid in, plus a reasonable rate of return? After all, that's what they would have gotten if government had simply required people to purchase insurance for their retirement, instead of effectively nationalizing the retirement-security business. So let's look at those numbers.

Take a worker who began paying payroll taxes in 1937, when Social Security began, and worked until 1982—45 years in all. If he paid the maximum in payroll taxes, that would have amounted to a 45-year total of $12,828. He and his wife would be "entitled," by law, to first-year benefits of $13,217. In 1937, the average person did not even live to be 65. But today, a 65-year-old worker has an additional life expectancy of 14.2 years, and his wife's is 18.5 years. Their lifetime benefits will total $375,000—28 times the amount paid in.

By no stretch of our moral or mathematical imagination can the elderly be said to be entitled to such vast sums at the expense of today's working people. And at long last the younger people of this country are beginning to realize it. A group called Americans for Intergenerational Equity has just come into being and will have much to say about such issues in the years to come. If today's baby-boomers are to have any sort of retirement security, it's essential that we reform the insane Ponzi scheme we've all been saddled with.

In this regard, other Western countries are way ahead of us. Tax-funded, pay-as-you-go retirement systems are in similar trouble all over Europe—but are no longer considered untouchable. Cost-of-living increases have been eliminated or cut back in Belgium, Germany, and Italy during the past few years. More significantly, Great Britain has modified its system to allow people to opt out of all but the basic level of its tax-funded retirement system and to purchase private insurance instead. And Chile has gone all the way, allowing people to shift to a fully private system based on "individual retirement accounts" (IRAs).

Social Security cannot survive the combination of today's lower birth rates (too few workers to support the retirements of the baby-boomers) and greatly increased longevity. It will have to be replaced by an actuarily sound, private, IRA-type retirement-insurance system (plus charity or welfare for those of the elderly who actually are poor). But the longer Social Security remains politically untouchable, the more calamitous the inevitable transition period must be.