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Monday, December 30, 2024

Social Security and the End of the Age of Responsibility

Background

On December 21st, Congress reiterated its disinterest in fiscal prudence. While its free-spending inclinations have long been obvious, the affliction is certainly getting worse, illustrating a broader surrender to populism.

On December 21st, Congress passed the cheerily named "Social Security Fairness Act". With this act, they dismantled a 41-year-old, reasonable compromise passed overwhelmingly by a Democratic Congress and Republican Senate and signed into law by Ronald Reagan.

The Reasonable Provisions Being Repealed

If two people both worked a fast-food job part-time for their whole lives but one of those people also had a full-time government job with a lifetime pension that pays more than Social Security, while the other one never held another job, should they receive the same Social Security benefit?

While explanations of what this act does immediately defy a normal person's interest, the rationale behind the WEP and GPO provisions is eminently sensible.

Social Security was designed during the Great Depression to ensure that everyone was eligible for some income and a retirement in their later years. It would reduce any necessity for people to work the entirety of their lives. Moreover, it was intended to provide proportionally more for low-income workers than high-income workers. Like the progressive tax structure, the formula used to calculate benefits, was more favorable to low-income workers.

With taxes, lower income workers pay a lower percentage of their income, but with Social Security, it works in the reverse direction. Social Security basically is designed to replace a percentage of your income in retirement, and for lower-income workers, that percentage is higher. What the designers of Social Security didn't account for, however, are people who split their working lives between a Social Security-eligible job and a Social Security-exempt job. Readers may not be aware, but there are certain jobs, generally government jobs, where workers pay into and receive a government pension in lieu of Social Security. They do not pay Social Security taxes, and they do not receive Social Security benefits.

The progressivity of the formula would have worked as intended as long as people were in one or the other, but a problem arose because some people worked a Social Security job for part of their lives and a non-Social Security job for another part. Even if the worker worked full-time her whole life and received her full government pension in retirement, the Social Security formula assumed she spent half her life unemployed, and replaced a high percentage of her income as it was designed to do to support low income workers.

The Windfall Elimination Provision (WEP) was designed to address that. It didn't remove her Social Security benefits entirely, but it adjusted them down to account for the fact that this isn't a low income person, and so shouldn't receive the favorable benefit calculation that was intended for them. It was entirely reasonable, aligned with the program's intent, and improved the financial outlook.

The Perception of Unfairness

Unfortunately, these provisions created a perception of unfairness. It meant two people who paid the same amount into Social Security could receive different benefits. This outcome offended an intuitive sense of fairness. Of course, in the broader sense, it was supposed to be unfair, the way progressive taxes are unfair. Rich people pay more taxes because they're better able to afford it. Likewise, two people who paid the same into Social Security shouldn't get the same benefit if one of those people was poor and had no other source of income.

The Effect

The average pensioner, who, for the last forty years, received reduced Social Security benefits given their pension income, retires at 62, three years earlier than people on Social Security. And for income, 61% of the people whose Social Security benefits were cut due to WEP are earning more in retirement than the average Social Security beneficiary. Nearly 1/3 of the people who will get a Social Security raise are already earning more than twice as much from their pension.

Nearly one third of people who will get a Social Security boost are making more than two times the average Social Security recipient.

This is an entirely unnecessary change in Social Security, but it again highlights how political culture has changed. Forty years ago, elected officials had enough wherewithal to say no to their constituents, that the greater good required some sacrifice, that not everyone could benefit in all things in perpetuity. That restraint has been dwindling ever since.

Republicans used to at least talk about cutting ballooning, unpaid-for entitlements, but have completely abandoned that because it was hurting them. During the presidential campaign, both candidates promised to expand tax credits and cut taxes for important groups. No one mentioned cutting spending or the debt.

Fifty years of increased deficit spending with no adverse consequences has taught the public and the politicians seeking their votes to make ever-growing promises unconcerned with the eventual bill.

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